Local Public Finance
So far, we have regarded the government as one agent. In reality, there are many governments at different levels of the public sector. From now on, we consider multiple governments, including local governments and central government. Recently, fiscal dece
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Intergovernmental Finance
1.1
Decentralization and Local Finance
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So far, we have regarded the government as one agent. In reality, there are many governments at different levels of the public sector. From now on, we consider multiple governments, including local governments and central government. Recently, fiscal decentralization and deregulation between central and local governments have been discussed a great deal as a policy issue. This is partly because many governments fail in a real economy, as pointed out in Chap. 12. In a federal system, many local governments compete with each other. People can choose desirable local governments from among many local governments. Thus, local governments are more sensitive to the preferences of local residents. Thus, it would be desirable for local governments to provide impure public goods or local public services. However, competition among local governments does not necessarily attain the first-best outcome. Central government can do better than local governments in a variety of issues. From this viewpoint, it is important to investigate the appropriate division of power among the various levels of government. Thus, what is the optimal allocation of economic responsibilities among levels of government? This chapter considers local public finance from the viewpoint of the appropriate roles of the national and subnational governments and the associated responsibilities among levels of government.
1.2
The Decision System of Intergovernmental Finance
Theoretically, there are two extreme decision systems for intergovernmental finance. # Springer Science+Business Media Singapore 2017 T. Ihori, Principles of Public Finance, Springer Texts in Business and Economics, DOI 10.1007/978-981-10-2389-7_13
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Local Public Finance
(i) All decisions are conducted by central government and local governments simply follow these decisions. (ii) All decisions are conducted by each local government and central government does not intervene. The former system is the centralized type of decision system, while the latter system is the fully decentralized type. A more realistic situation is one that is a mix of (i) and (ii). Namely, we have a third system. (iii) Central and local governments make decisions and both have appropriate roles in intergovernmental finance. Many developed countries adopt the third system for intergovernmental finance. If governments are perfect in the sense that they know the precise details of residents’ preferences and public needs and can control resources optimally, any system can attain the first best. System (i) is the simplest; however, system (ii) can also attain the first best if local governments can cooperate and coordinate appropriately with each other. In addition, system (iii) can attain the first best. If the administrative and management costs are the same, the choice among the three systems does not matter. In reality, though, the economic activity of the public sector has certain scales of economy. For example, fixed costs ma
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