The Economic Efficiency Case for Decentralized Government

Introduction Debate on size of local governments based on certain theories European Charter of Self Government: - local governments should be as small as possible - principle of subsidiarity

The Allocation Efficiency Case: Oates Theorem The optimal size is that witch matches supply with the demand of public services Centralized choices don’t take local variations into account Based on Pareto optimality The community should bare the costs of the services required – case for decentralization

Economies of Scale Theory Concerned with technical efficiency in production of outputs Exist when total production costs increase proportionately less than outputs The economically optimal size of local government is when the marginal cost equals the marginal social benefit

Maximum population size Based on citizen participation in local politics Impact of the individual in groups Large local governments are also accessible to citizen participation Except maximum population there are two possibilities to achieve minimum efficient scale: - inter municipal cooperation - contracting private sector firms

Minimum Population Size To avoid administrative overload for central government When minimum size is still large, decentralization of service provision is the optimal solution Greater need for central government intervention to diminish disparities in per capita taxes

Optimum population size by King Population is the relevant determinant of size All individuals have the same income and equal marginal utilities which are constant over time Service production technologies are constant over time Narrow theory as it ignores cultural, religious, ethnic and other factors that influence taste( except income)

Local Governments in Europe The size of local governments vary in range, from countries under 1000 ( France, Greece, Ireland) inhabitants per local government and some with more than ( Sweden, UK) Substantial differences in size across European countries

Conclusion The size of governments in general is determined by historical, traditional, social and other factors rather than theories of economic efficiency