Returns to scale in public production

To a large extent, this literature has been concerned with empirical estimation, but it has yet to resolve the issue of whether there are economies or diseconomies of scale in the production of local public goods. This paper reviews the existing literature and finds it lacking in several important respects. In particular, it notes that all previous studies are based on the assumption of a constant quality level per capita with scale economies attributed to variations in the size of population served. The report takes a novel approach by differentiating between returns to quality scale and to population scale. The value of this approach is that it allows for the separate estimation of the response of government costs to the level of government activity and to population. The empirical analysis of paid fire departments in New York State collaborates some results from earlier studies in that it finds constant returns to population scale. In addition, the study finds significantly increasing returns to quality scale. These findings suggest that consolidation of fire departments may not result in cost savings and that increasing the quality of fire protection production may significantly lower the cost per unit of quality. (Author abstract)