Externalities in the Fragmented Metropolis: Local Institutional Choices and the Efficiency-Equity Tradeoff

Abstract

A highly fragmented system of local governance represents a market-like arrangement in which competition among service providers benefits citizen-consumers by improving the efficiency of local public service delivery. Yet, the local public market can also fail, producing negative outcomes for some communities and their residents. Because fragmentation can have differential impacts on the welfare of different groups of citizens — benefiting others and harming some — the organization of the local public sector raises important equity questions. This research focuses on the negative outcomes or externalities generated by local government fragmentation, specifically urban sprawl and spatial economic segregation. The results of the empirical analysis suggest that the design of the local public sector structure involves a tradeoff between efficiency and equity.

Keywords: Government Fragmentation, Externalities, Urban Sprawl, Economic Segregation

JEL Classification: H70