Given the spatial character of many local “public” goods, the traditional recommendations for internalizing benefits–either rejurisdiction or grants–appear insufficient to achieve the optimal levels of output. This analysis indicates that frequently both rejurisdiction and grants are necessary. Contrary to the conventional opinion, the economically optimal constitution may allow spillovers, and such internalization as is required can be more appropriately accomplished not by the extension of boundaries, but by their restriction and the addition of more jurisdictions.
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