Academic journal article Journal of Economics and Economic Education Research

Economies of Scale and the Provision of Public Goods by Municipalities

Academic journal article Journal of Economics and Economic Education Research

Economies of Scale and the Provision of Public Goods by Municipalities

Article excerpt

ABSTRACT

This paper adds to the literature that examines economies of scale in the provision of municipal services. Private sector economies exist as average costs decline as output expands. Likewise, economies exist in the provision of public services as average costs decline as the number of recipients of the service increases.

A discussion of declining average costs inevitably involves a discussion of municipal consolidation. Proponents of larger local government believe bigger government is more efficient government. Citizens residing in consolidated cities will enjoy quality city services at a lower cost. In addition, consolidated cities are more effective at long range, comprehensive planning which spurs regional economic development.

This study utilizes a sample of municipalities in Alabama to empirically test for economies (or diseconomies) of scale in the provision of public services. A brief history of municipal consolidation is presented in the next section. Section two contains the theoretical arguments for the creation of mega-municipalities and for numerous, fragmented local governments. In section three, a review of the existing literature is presented. Finally, the last section contains the results of this study and some concluding remarks.

BRIEF HISTORY

Consolidating smaller municipalities into a single metropolitan government offers the promise of efficiency to many observers. By ending the duplication of services in nearby cities and taking advantage of economies of scale, lower-cost public services are possible. Centralized government will be attractive to industry and will result in increased economic development.

The notion that bigger local government is better local government is not new. It traces its origins, according to Andrew Sancton (2000), to debates surrounding the consolidation of local governments in the Philadelphia area in 1844. "Eli K. Price, the state senator from Philadelphia, presented one of the first ever projections of financial savings. He claimed that the elimination of 168 tax collectors from the different jurisdictions would save $100,000 per year" (Sancton 2000:28).

New York City is the product of the consolidation of 15 cities in five separate counties in 1898 (Sancton 2000). Twelve municipalities were merged with Birmingham by the Alabama legislature in 1910. While a metropolitan-wide referendum on the merger passed, a majority in the municipalities being merged were opposed. Sancton (2000:37) points out that since that time, "no solvent American municipality has been forced against its will to lose its incorporated status and join another."

The most recent articulation of the case for consolidation comes from David Rusk, the former mayor of Albuquerque, New Mexico. His book, Cities Without Suburbs has successfully placed "the issue of municipal boundaries back on the American agenda" (Sancton 2000:79).

Nevertheless, the issue is typically unpopular with the voters. "Only 20 percent of referenda on consolidation are approved by the electorate (Harrigan and Vogel 2000). To cite a few examples, mergers were defeated in St. Louis, San Antonio, Sacramento, Portland, Charlotte and Knoxville. In fact, Knoxville voters have defeated consolidation plans on four separate occasions (Lyons and Scheb 1998).

A number of notable mergers and consolidations have taken place. The services provided by Dade County (Miami) were extended in 1957. Nashville and Davidson County were consolidated in 1962, Jacksonville and Duvall County were consolidated in 1967 and two years later, Indianapolis and Marion County were merged (Sancton 2000:71). More recently, Louisville and Jefferson County were merged in Kentucky.

THEORETICAL ARGUMENTS

"According to the consolidationists, the primary ills of local government stem from fragmentation and the 85,000 governments and over 500,000 officials that dot America's political landscape. …

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