Public Goods
New jurisdictions

Historians, sociologists and political scientists have long viewed economic innovations and trade as instruments of political change, but few economists have considered their implications for the political transformation that is taking place at all levels of government in Europe today. Even in West European countries, whose basic political and economic structures can be taken as given, there is discussion of new international institutions taking over national tasks, new regional policies representing the common interests of communities across national borders, and new local autonomies within current national frontiers. Economic integration invokes the need to redraw jurisdictions to satisfy the requirements of unified, more competitive, more sophisticated markets.

In Discussion Paper No. 779, Research Fellow Alessandra Casella considers the role of expanding markets in the emergence of new jurisdictions. While European economic integration may be accompanied by the simple centralization of government functions at a supranational level for specific public goods, there is pressure for a much more complex structure of administrative responsibilities. This aims both to achieve sufficient standardization to ensure the smooth functioning of integrated markets and to recognize the heterogeneity of preferences over public goods that accompanies different economic roles, development levels and cultures. This seems to be leading to stricter international cooperation in some respects and increased regional differentiation in others.

Casella develops a simple general equilibrium model in which welfare depends on private exchange and two public goods, and preferences over the second of these are heterogeneous. Administrative costs initially make the formation of two separate jurisdictions too expensive, but increased trade induces agents to recognize differences in their preferences over public goods. As the market expands, however, reliance on the public goods increases and so does the importance of access to the correct public good. This results in the emergence of a federal system in which lower-level jurisdictions will multiply even in the presence of administrative costs.

Trade as an Engine of Political Change. A Parable
Alessandra Casella

Discussion Paper No. 779, March 1993 (IT)