education and childcare. The government has also supported associations in other ways, such as by assisting local governments in purchasing school buses.

Contracting out of services is also an alternative to direct consolidation. French local governments often contract with private companies to deliver water and sewer and German municipalities contract with counties for private and secondary education (World Bank, 2003:16). Hungarian local governments frequently contract with companies that provide solid waste collection and disposal.

Contracting out and associations can be good options in many countries, but have their disadvantages (see Swianiewicz, 2002). Contracting out requires a developed market to deliver the services or another government with the capacity to deliver services on behalf of other local governments. Associations normally entail significant political costs of getting agreement and ensuring cooperation. Further, accountability and transparency are more difficult to achieve through associations. Given these disadvantages, associations are less likely to occur unless prompted by incentives provided at the national level.

# **3. Consolidation and the Costs of Delivering Government Services**

This paper follows the approach used by Dowding et al. (1994) in dividing the discussion on the appropriate size of government into supply-side and demand-side effects. This section is an examination of the supply side issues and the following section addresses the demand side concerns. The supply-side issues are primarily those associated with the extent of size and scope economies.

One common argument in favor of consolidation is that larger governments can provide services at lower unit or per capita costs or deliver better quality services at the same cost by capturing economies of scale. Alternatively, indivisibilities in production, which are most likely to arise for very small units of government, can be offset with a larger scale. The recent decision to consolidate governments in Jordan was based heavily on the expectation that costs could be reduced. For example, additional water may be treated at the same plant for little additional total cost (that is, marginal costs are lower than average costs), thereby permitting unit costs of treatment to fall. Also, consolidation of municipalities may result in more efficient administration and elimination of redundant employees. This section examines the extent to which costs can be reduced by consolidating local governments.

The concept of scale economies as used in economic analysis has a very precise meaning. The extent of scale economies or diseconomies is determined by examining how a proportionate increase in all inputs affects output, while holding all other factors constant. Increasing returns to scale exist when the output increase is more than proportional; decreasing returns occur when the output change is less than proportional; and constant returns are observed when the change is exactly proportional. This concept, though useful for some purposes, may be limited in certain applications, such as for evaluating the effects of amalgamation, because all input factors may not change 8