Economies of Scale in Local Communal Services in Hungary

Abstract

Knowledge of whether, and over what range of output, there are economies or diseconomies of scale in providing local communal services is an important question from a theoretical, practical and regional political point of view. The theoretical side of the question is connected to the primary research regarding the optimal city size. If an optimal city size can actually be established, then a valid policy argument can be made for fostering its approximation. However, theoretical considerations are sometimes based on those types of assumptions, which are often not valid in reality. Therefore, empirical investigations are essential in this research area.After a short theoretical overview, the paper initially gives a general outline of previous controversial empirical evidence on economies of scale regarding community size and the provision of local communal services. In the second part, the empirical findings are presented; these concern economies of scale in local communal services based on a large and detailed database, which consist of almost 300 Hungarian settlements. During the research, a number of methodological questions have occurred. For example, there are several solutions for the organisational structure providing local services, from a large holding to the smaller individual companies. Considering this and some other issues, the main results suggest that on a community level, there are moderate economies of scale in water supply, sewage disposal and district heating and a moderate diseconomy of scale in refuse collection until 5 thousand inhabitants. Above this level there is no connection between the settlement size and the average cost of services. The results are mainly consistent with the previous findings: there are economies of scale under a certain threshold, but after this, unit cost reduction is not feasible. This threshold can be different in the different types of services.

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