Study Questions 4

ECO 4554 Economics of State and Local Government Study/Test Questions Topic 4: Optimal Jurisdictions These questions are designed as study questions to enhance your economic knowledge and your analytical skills. I will also use them as test questions. Because you have the questions in advance, I expect your answers on the tests to be well-organized, clear, coherent, and concise. You might write trial answers to each question in advance, or at the very least, outline the answers. You may not bring any written materials to the test, but if you’ve prepared answers in advance, you can immediately begin writing and still write competent and thorough answers. Feel free to consult one another on the questions. In fact, I strongly encourage you to discuss the questions with one another. No matter how confident you are of your knowledge, your command of the material and your preparation for the test can be enhanced by sharing your knowledge. Do not, however, simply rely on your fellow students to provide you with the answers. When the time for the test comes, you will be on your own. Although in most cases, the questions do not specifically request that you illustrate your answer with an appropriate diagram, diagrams are usually quite helpful both in undertaking the analysis and in illustrating and explaining your answer. I expect you to know the relevant diagrams, to use them, and to interpret them. I encourage you to include them in your answers. 4-1. For each item below, define the term or state the theorem or explain the concept. • • • •

Contracting out Joint service agreement Correspondence principle Clustering

4-2. (Core Principle) Fisher (pages 120-123) discusses the four economic criteria for determining the optimal number and size of communities or governments. Based on each criterion, excluding administrative and compliance costs, what is the optimal number of communities and what is the optimal size of each community? Based on each criterion, explain why larger communities are not always more efficient than smaller communities. 4-3. The three criteria—homogeneity of preferences, economies of scale, internalization of spatial externalities--that determine the optimal size of a community often conflict with one another. For example, a community that is small enough to satisfy the Tiebout hypothesis may be too small to achieve full economies of scale or too small to internalize all spatial externalities. Or, a community that is large enough to internalize all spatial externalities may encounter diseconomies of scale. Each of the following policies may reduce or eliminate one of these conflicts. For each one, explain which conflict it addresses and how it reduces or eliminates that conflict. a. Deconsolidation of larger communities into smaller communities. b. Contracting out and joint service agreements. c. Intergovernmental grants. 1

ECO 4554: Economics of State and Local Government Study/Test Questions: Topic 4 d. Balancing the costs of inefficiency. 4-4. For years, the Tallahassee Democrat has argued editorially that consolidation of Tallahassee and Leon County into a single municipal government would improve efficiency in the delivery of public services and eliminate wasteful duplication of effort. Choose either the affirmative (for consolidation) or the negative (against consolidation) side of this proposition. Use each of the economic criteria (other than administrative cost) that determine the optimal size of communities to argue that your position results in a more efficient size community than the opposing position. [You are only required to develop an argument for one position, but you should also be prepared to argue in favor of the opposite position if necessary.]

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