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.
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 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.]