Another consideration presented in Andrews et al. (2002) is the effect of size on student achievement. For example, parents are often more involved in neighborhood schools, and parents are a very important input in education. Thus, consolidation could lower the quality of education if it effectively eliminated neighborhood schools. On the other hand, larger governments may be able to deliver services that are not cost effective in smaller places. The ability to offer more specialized courses in the schools is an example. Although there are many methodological issues to address in this literature, there seems to be a general consensus that smaller schools and districts lead to better outcomes, especially for minorities and those from low socio-economic backgrounds. Lee and Smith (1997) estimate that optimal achievement occurs in high schools with between 600 and 900 students.<sup>7</sup> But, the results suggest that the effects of consolidation on service quality must be addressed based on issues that are likely to be very country and culture specific.

A related issue is whether school inputs influence education performance, and particularly whether schools and school resources are more important in predicting future success than are families.<sup>8</sup> Hanushek and Luque (2002) analyze the role of schools on performance using data collected from more than 40 countries. The research suggests that providing students with more resources generally increases performance, with the relationships being similar in developing and developed nations.

# _<u>Size Economies in Water Services</u>_

Local public services that can be categorized as vertically integrated normally have two separate dimensions: production and distribution.<sup>9</sup> For example, water is treated and distributed to consumers through pipelines. Production may also involve several steps, such as collection and treatment of water, and normally occurs at a small number of production facilities. The impact of consolidation on costs depends on the relative size of these factors, which can often have offsetting effects. Size economies are likely to exist for production, as more water can be treated at the same plant at declining marginal cost. However, distribution costs, which depend heavily on population density and terrain, tend to increase with size.

Consolidation of water districts can increase distribution costs in two ways. First is the need to expand the infrastructure including piping, water towers and other parts of the distribution system, and to make infrastructure compatible across systems. Second are the operational costs of pumping water through the system. Both costs can rise with increased distance from the water source. Boisvert and Schmit (1997) weigh production economy gains with the diseconomies of distribution for rural water systems.<sup>10</sup> They

> 7 As noted in Andrews et al. (2002) this analysis does not include any school-input data and the results should be treated with caution.

> 8 See Heyneman and Loxley (1983).

> 9 Note that horizontally integrated services, such as education, often differ in that the user goes to the point of production to consume the service, or the service is often produced at the user’s location, such as with police and fire protection.

> 10 The analysis uses data from 37 rural water districts in New York.

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