Local authorities are being asked for their ideas on how drones could be put to use in their areas, such as for transporting medical supplies, working in hazardous conditions including fires and floods, or monitoring pollution.
The Flying High Challenge is being run by charity Nesta and Government agency Innovate UK and hopes to help put the country at the forefront of the "fast-growing drone industry".
Cities, councils and Local Enterprise Partnerships are being invited to share their ideas - and the challenge will see five suggestions explored to see if they could operate locally.
Tris Dyson, executive director of Nesta's Challenge Prize Centre, said: "If we are going to have drones in our towns and cities they must be fit for our society.
"By finding uses for the technology - beyond toys for hobbyists or used in conflict - the UK can establish itself as a world leader in drones.
"We need to commit to finding approaches that work at the local level and meet the needs of people without risk to public safety or nuisance."
Meanwhile, new laws requiring drone operators to register and sit safety awareness tests have been proposed as part of a clampdown on rogue users.
Police will be given greater powers to prevent unsafe or criminal use of the machines while new technology could be used to create no-fly zones for drones.