Study Questions 4

4.1 A. Contracting out is when each community contracts with a private supplier or with another community to supply it with public services. The producer of public services supplies a number of different communities, each of which is homogeneous, but by serving multiple communities, the producer is able to achieve maximum economies of scale. B. Joint Service Agreements are when several small jurisdictions join together to supply public services while maintaining their population at a size consistent with homogeneity of preferences. (Both contracting out and joint-service agreements allow each community to benefit from lower costs by achieving maximum economies of scale in production while each community retains the ability to provide a different quantity of the public service that is efficient for its residents.) C. Correspondence Principle is when the size of a government corresponds to the area of benefit from the goods it provides. Each public good is provided in the smallest (that is, the lowest-level) government consistent with no externalities. It generates a federal system of governments along a spectrum from many small local governments to one national government. To justify any sub national government, there must be variation in the desired amounts of public goods so that each government can provide a different amount of that good and confine the benefits within its boundaries. Otherwise, it would be just as efficient to have one central government provide those goods to all using a number of different production plants. D. Clustering is a way to reduce decision making costs. By clustering goods together with similar optimal sizes into single government units, reduces both the number of government layers and the number of separate governments in each layer. 4.2 The optimal number of communities is contingent with the demands of the community. If all the people in the area demand an exact amount of services and the entire community is uniform, there is no need for multiple, smaller communities. One large governmental unit would be sufficient. This would be very close to the Tiebout hypothesis. What happens is, though, the community may have many different demands and the general welfare of the people cannot be supported without the need of splitting up the areas by the efficient measure of the government and the people. Spatial Externalities: The community must include the correct size of people with the correct benefits with both taxes and spillovers of benefit. An example would be a government run education system in which the community benefits from an educated populace while the taxes for the schools are portioned out to the correct tax payer base. Economies of Scale: The correct size of the economy so that a community can take full advantage of their ability to supply a resource but to spot at a point where their costs are more than their benefits, such as a diseconomy of scale. The diseconomy of scale costs more person than the correct, efficient amount. 4.3

A. Deconsolidation of the single large homogeneous community into two smaller homogeneous communities simultaneously allows satisfaction of the Tiebout criterion of homogeneity and takes advantage of maximum economies of scale without encountering diseconomies of scale. B. Contracting out and joint service agreements allow each community to benefit from lower costs by achieving maximum economies of scale in production while each community retains the ability to provide a different quantity of the public service that is efficient for its residents. a. The residents of each community are homogeneous in their preferences for public services, but the residents in different communities have different preferences for public services. b. Each community attains a Lindahl equilibrium that satisfies the Tiebout hypothesis. c. Because the public service is supplied to multiple communities, it is still possible to achieve maximum economies of scale in production. C. Intergovernmental grants from a higher level of government to a lower level of government can compensate for inter-jurisdictional benefit spillovers while allowing each community to maintain the size that satisfies the Tiebout criterion. Theoretically, intergovernmental grants can internalize either benefit spillovers (a positive grant or subsidy) or cost spillovers (a negative grant or charge imposed by a higher level of government on a lower level of government). However, in the real world, we do not observe negative grants, so the device of intergovernmental grants is mainly useful for internalizing inter-jurisdictional benefit spillovers. D. Suppose that grants are not feasible for internalizing spatial externalities. Then, it may be necessary to compromise between a smaller size community with homogeneous preferences and a larger, non-homogeneous community that internalizes all the spatial externalities. There is a trade-off between the inefficiency costs of less homogeneity in a larger community and the inefficiency costs of un-internalized externalities in a smaller community. If it is not possible to satisfy both criteria simultaneously, an alternative approach is to satisfy neither one, but instead to compromise between them. We find a community size that minimized the combined inefficiency costs of heterogeneity and uninternalized spatial externalities. The community will be larger than the optimal Tiebout size but smaller than the size that internalizes all inter-jurisdictional spillovers. 4.4 Consolidation of communities in a metropolitan area or consolidation of city and county governments may enhance efficiency by internalizing spatial externalities or by achieving greater economies of scale. If consolidation of communities reduces the homogeneity of preferences among the residents, however, the greater efficiencies from internalizing externalities or from greater economies of scale are reduced or offset by the inefficiencies from less homogeneity of preferences among the residents of the consolidated community. Consolidation of governments may also result in jurisdictions that are too large. In other words, the consolidated jurisdictions may be larger than the optimal size to

achieve minimum average cost. The result of consolidation may be a change from multiple communities that are inefficiently small to a single consolidated community that is inefficiently large. Consolidation may even result in a change from multiple smaller communities that are optimal with respect to returns to scale to a consolidated community that is inefficiently large.