Economies of Scale in Local Government: General Government Spending

Abstract

The purpose of this paper is to determine whether larger or smaller municipalities are more efficient in their levels of overhead costs. The operative measure is per capita annual costs for these services. In addition, the issue of market structure as a factor in these costs is also to be studied. It is not for the purpose of considering costs for specific services but rather the general overhead items that are required of all local governments. The method of study will be to use the cities and towns of New York State over a number of years. This will ensure that the study group is relatively homogeneous over applicable state laws as well as giving a wide variation in the population levels studied. The per capita expenditures will be regressed against population and market power variables using several equation forms. The results will be tested for significance in scale effects and market power effects. Optimal population sizes will be calculated where possible. The outline of the paper is as follows: 1) Introduction, 2) Background issues, 3) The study design, 4) Data, 5) Results, and 6) Conclusions

Why Do Per-Household Expenditures Differ between Municipalities?

“…For example, Derksen's (1988) study of municipal amalgamations in European countries and Boyne's (1992) review of amalgamations in the U.S. indicate that larger units of local government were likely to operate at higher unit costs than smaller units of government. More recent U.S. studies such as Couch, King, Gossett and Parris (2004), Williams (2009), andSouthwick (2012) arrive at similar conclusions as do studies in other countries. 5 Canadian studies such as Desbiens (1996), Vojnovic (1998), Sancton (1996), Slack (2000), and Kushner and Siegel (2005), like those for other countries, concluded that economies of scale are not that significant.…”

Are There Economies of Scale in Highway Maintenance? What about Costs Due to Market Power?

“…Lisk [38] found that having competitive markets and competition for highway maintenance made a great deal of difference in the resulting costs. Southwick [4] and [36] also found that greater market power resulted in increased costs.…”

“…However, Link [35] uses translog estimation and finds economies of scale in Germany. Southwick found U-shaped average cost curves for police [4] and for general overhead spending in local governments [36].…”

Credit Risk of Icelandic Municipalities

“…Where these limits are is questionable. Some research put the mark on 20-25 thousand inhabitants (Gabler, 1969;Southwick, 2012). Other have argues that the optimum low cost is reached at around 100 thousand (Bodkin and Conklin, 1971) (Mabuchi, 2001).…”

“…One reason often mentions is a difference in the density of the population. In a research of US municipalities the outcome was that if controlled for the density of the population there was no economics of scales in municipalities (Southwick, 2012). Another explanation is a difference in the service that the community provides.…”