The Completely Decentralized City: The Case for Benefits Based Public Finance

American Journal of Economics and Sociology, The, Jan, 2001 by Fred E. Foldvary

The second challenge, providing services in ways that avoid major spillovers to non-members, is solved by the multi-level association structure described in Section I. The civic goods are provided by the lowest level of association in which the spillovers to non-members is minimal. In practice, many civic goods do not have many economies of scale and can be provided locally, or local associations can cooperate for mutual benefit, such as by helping one another with law enforcement when criminals escape a jurisdiction. As noted by Hamilton (1991, p. 675), the evidence from several studies suggests that "we have no particular reason to believe that scale economies are an impediment to wide community choice." An analysis of economies of scale among St. Louis jurisdictions, which are among the most polycentric in the United States, has shown no significant evidence of diseconomy effects of size on per-capita expenditures, consistent with other findings (Parks and Oakerson 1988, p. 122).

To avoid free riding, a higher-level association contract can specify that if a lower-level association secedes from the higher-level association, some compensation or continuing payment be made for those services from which the lower-level still benefits. When only some house-holds in a block wish to form a territorial association and maintain the local street or park and provide better security, the other services remaining directly under the city, then the city and the neighborhood can form a partnership, delegating some tasks to the association and sharing the costs. In this way, neither side is privileged. If the association members wish to adopt some rule or change (such as blocking off one end of the street) that the non-members do not favor, an arbitration board can assign compensation for the disfavored party. This then shares the social cost among the whole neighborhood rather than the majority imposing it on a minority. The association might decide that the compensation cost is not worth the benef it of the new rule. Either way, as Ronald Coase (1960) points out, economics suggests either win-win solutions or at least some sharing of costs rather than the win-lose method typical with imposed centralized government. Another option, as noted by Heath (1957, p. 136), if some owners can hold out, is that "they and their unincluded properties will naturally receive second consideration in all matters of public benefit or preferment. Unfranchised as owners, their influence and advantages all will be of second rate."

With multi-level associations, the financing is bottom-up, although the assessments can be top-down. A lower level is assessed by the higher level and pays assessments or fees only to the next higher level. The higher level may assess the payments according to the land value of the sites in the area, but the funds are collected and sent up starting with the lowest level. There could be special boards set up to assess rent and land value with representatives from several association levels, but the assessments performed by professional appraisers.