Economies of scale in public service delivery is an important concept in decentralization and localization: does the cost of public service delivery (per household or person) increase when services are delivered by smaller jurisdictions? If scale economies are present, it would be inefficient to assign functional responsibilities to local governments below the minimum efficient scale.
Juan Luis Gómez-Reino, Santiago Lago-Peñas, and Jorge Martinez-Vazquez recently authored a new working paper, “Evidence on Economies of Scale in Local Public Service Provision: A Meta-Analysis.” In it, they describe how the standard theory of optimal jurisdictional size hinges on the existence of economies of scale in the provision of local public goods and services. However, despite its relevance for forced local amalgamation programs and related policies, the empirical evidence on the existence of such economies of scale remains elusive.
The main goal of this paper is to produce an updated and comprehensive quantitative review of the existence of economies of scale in the provision of local public goods using a meta-analysis approach to systematize the wide range of empirical approaches and modeling frameworks found in the previous literature.
Their analysis confirms the presence of moderately increasing to constant returns to scale in the provision of local services across traditional local service sectors such as education, water and sanitation, and garbage collection. They identify best practices for future empirical research in this area, which should rely on physical output as the metric of activity, production cost data as the measure of input expense, and a translog specification function for the modeling of cost functions. Finally, they find evidence that the determinants of output cost elasticity include bidirectional publication bias and population density but do not include the presence or absence of modern “lean” production technologies or the (perceived) capital intensity of the sector, contrary to conventional wisdom. These findings have significant policy implications for countries considering jurisdictional consolidation programs.
Access the full working paper from Georgia State University’s International Center for Public Policy (ICePP) website: Juan Luis Gómez-Reino, Santiago Lago-Peñas, and Jorge Martinez-Vazquez. 2021. Evidence on Economies of Scale in Local Public Service Provision: A Meta-Analysis. ICePP Working Paper 21-16.