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 un-
internalized 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.