Economic Advantages of Decentralization:

In a federal system, it is possible for people to shop around for the community whose tax and expenditure policies are best suited to their needs. In this way, an element of individual choice among various combinations of government policies is possible, an option that is not possible for federal policies.

As a result of consumer mobility, one would ultimately expect residents of communities to have similar tastes for government policies. Some communities will emphasise good public schools and attract families with school-age children. Others will stress security and  hospitals and tend to attract retired persons. Still others may emphasise low taxes (and few government services) for those who prefer private goods to government services. This process of consumers' choosing places of residence in response to differences in governmental services enhances the efficiency advantage of sub-national governments. Of course, this process does not guarantee that every person will obtain exactly the type of government he or she would prefer. Within each community there will still be  differences of opinion. Moreover, many factors in addition to government policies influence a person's choice of a location. The availability of jobs, proximity to friends and relatives, climate, and other factors play a role in a locational decision. Nonetheless, the possibility of 'voting with one's feet' clearly enhances to some degree the attractiveness of a federal system as an institutional arrangement for providing government services. A further advantage is that local government may be more responsive to the needs of its citizens. The political process in smaller government units may be more efficient than in larger units. Voters are likely to be more knowledgeable about how their tax dollars are spent. In short, when government is 'closer to the people', it may possess fewer  inherent defects as a decision-making mechanism. Though it is not obvious that this conclusion is always true, yet it is widely  believed to be so.

Finally, experimentation and innovation are likely to be greater in a federal system. With thousands of local governments, some are  certain to be experimenting with  new policies that are quite different from those used by the bulk of communities. Different  approaches to police investigation, instruction in schools, and environmental policies will be tried. This process of experimentation can be beneficial even if some of the new policies prove to be failures. A successful policy innovation in one community can be adopted by other communities. If a new policy fails, other communities benefit from that knowledge too and can avoid a similar error.