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On the Optimal Structure of Local Governments

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  • Hochman, Oded
  • Pines, David
  • Thisse, Jacques-Francois

Abstract

The authors show that space matters in designing the optimal provision of local public goods. Geography imposes a particular institutional structure of local governments due to the overlapping of market areas associated with different local public goods. The optimum can be decentralized through local governments that have jurisdiction over market areas of all local public good types. This implies that the appropriate suppliers of local public goods are metropolitan governments which finance them through user charges and land rent. In addition, the authors' approach invalidates the prevailing theory of fiscal federalism, according to which a layer of government should be established for each type of local public good. Copyright 1995 by American Economic Association.

Suggested Citation

  • Hochman, Oded & Pines, David & Thisse, Jacques-Francois, 1995. "On the Optimal Structure of Local Governments," American Economic Review, American Economic Association, vol. 85(5), pages 1224-1240, December.
  • Handle: RePEc:aea:aecrev:v:85:y:1995:i:5:p:1224-40
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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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