Optimal Federalism Disadvantages of a decentralized System Scale economies-increasing returns to scale would suggest larger community could provide good at lower average cost Communities could jointly run some activities 16
16 Optimal Federalism • Disadvantages of a Decentralized System – Scale economies – increasing returns to scale would suggest larger community could provide good at lower average cost. • Communities could jointly run some activities
Optimal Federalism Disadvantages of a decentralized System Inefficient tax systems -capital may be very immobile across countries but very mobile across jurisdictions within a country eads to tax rates that are“ too low.” 17
17 Optimal Federalism • Disadvantages of a Decentralized System – Inefficient tax systems – capital may be very immobile across countries but very mobile across jurisdictions within a country. Leads to tax rates that are “too low