Theoretical Perspectives, International Experience and Policy Reform
Studies in Fiscal Federalism and State–local Finance series
Edited by Santiago Lago-Peñas and Jorge Martinez-Vazquez
Chapter 6: Local government size and efficiency in capital-intensive services: what evidence is there of economies of scale, density and scope?
The analysis of the optimal size of the municipality as an appropriate unit for the provision of services has formed an essential part of the economic literature since the appearance of seminal studies by Oates (1972), Mirrlees (1972) and Dixit (1973). Key studies have subsequently shown that phenomena such as the size and spatial dispersion of the population determine the formation of economies of scale and those of density at the local level (e.g. Deller, 1992; Ladd, 1992; Carruthers and Ulfarsson, 2003; Hortas-Rico and Solé-Ollé, 2010). The existence of economies of scale characterizes many publicly provided goods. However, when these goods are provided by the local government, the problem of the sub-optimal size of this jurisdiction for their provision might arise. Thus, the first question to address, and one of an eminently functional nature, is the optimal geographic scale for this service: does the municipality coincide with what might be determined as the optimal scale of production? In answering this, certain elements acquire particular importance, most significantly the size of the population.
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