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Local Public Finance

13

Intergovernmental Finance

Decentralization and Local 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 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.

 
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