Are There Economies of Scale in Municipal Government Expenditures?

Abstract

One factor that is relevant to determining the optimal size of local government is whether there are economies of diseconomies of scale in municipal government expenditures. This paper examines the question by analyzing municipal government expenditures of 487 municipalities with populations greater than 50,000. At first glance it appears that municipal expenditures are characterized by diseconomies of scale, but because there is a close correlation between total population and population density, one must be careful to make sure that the effects attributed to total population are not in fact due to variations in population density. When cities are divided into groups by population density so that they are not compared with other cities with very different densities, the evidence for diseconomies of scale goes away. It appears that after variation in density is taken into account, municipal government expenditures are characterized by constant returns to scale. Thus, there is no reason to think that either consolidations or secessions at the local level would appreciably affect per capita government expenditures.

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