Local Government Consolidation in the United States By Dagney Fa ...

effects of consolidation on economic development should be viewed cautiously. Although these results do not rule out the possibility that consolidation will influence economic development, the sum of the impacts should be viewed as negligible to nonexistent.

Potential Savings From Consolidation

Estimating the savings from government consolidation presents significant technical difficulties. In order to avoid some of these challenges, we relied primarily on two methods. The first method we employed was an estimate of the savings that would be due to economies of scale in producing local government goods and services. The second method was an efficiency model of local government. We estimated scale economies and efficiencies using both aggregate and functional area models. Scale economies exist in the private sector when a firm that optimizes its production costs in the face of some fixed costs (e.g., plant and equipment, office space, or insurance coverage) enjoys lower per-unit production costs as the level of production increases—that is, average costs decrease as the level of output increases. This idea is applicable to the government as well as the private sector.

Inefficiency occurs when a government fails to produce the maximum output obtainable with a given level of inputs. Economists (and the general public) have long recognized that there is likely to be a general slackness in government operations. The result is that its costs are higher. Government inefficiency may result from several sources, including a lack of competition, coordination difficulties, corruption, or padding the budget. We refer to this type of inefficiency as G-inefficiency.

For most sections of this book, our estimates of the potential savings from economies of scale were derived from data for municipalities of various sizes from samples of states in the Midwest, South, and Southwest. This approach was used to capture the significant regional differences in local governments’ structure which occurred as a consequence of the historical differences in the colonization and development of each region. Each of these regions possesses significant regional similarities that permitted us