Decentralization of government's taxing and spending powers can better enable government to respond to the differing preferences of a heterogeneous population. A system of local jurisdictions offering a variety of tax/service bundles can serve as a competitive marketplace in which citizens shop for their utility-maximizing bundle.
These advantages, however, come at a cost. Decentralization, to an extent necessary to satisfy the full range of citizen preferences, may mean inefficient provision of government goods. The population benefiting from government provision of a good may exceed the population of the providing government. Unable to capture the full benefits and unable to impose a share of the cost on benefiting nonresidents, governments are likely to underprovide a good. Furthermore, such a decentralized system may incur both excessive administrative costs, due to duplication and unexploited economics of scale, and excessive compliance costs. Reducing these costs may require greater centralization than is consistent with fully satisfying the preferences of the heterogeneous population.
Efficient provision of government goods and the reduction of decisionmaking costs requires greater centralization of government powers. This is not a problem if it is assumed that government will act in the general interest; if government is a benevolent despot.
If, instead, government is comprised of serf-interested individuals, then the actions of government may not advance the general interest and, in fact, could work against it. In this case, greater centralization increases the risk of greater fiscal exploitation of the public by government. Increased decentralization and the fiscal competition it introduces can serve to constrain the exploitive tendencies of a self-interested government.
These benefits and costs of greater decentralization must be considered by the Soviet Union as it studies what form of federal structure to adopt. It must weigh the risk of fiscal exploitation, a risk that Soviet history suggests is not insignificant, against the potential efficiency gains of greater centralization.