Local Public Goods:

We have seen that in presence of public good and externality there could be efficiency gains through government  intervention. It is now time to recognize that there are frequently geographic or spatial dimensions to the provision of public goods.

Consider, for example, the public provision of a police force in Bhopal. This police force provides benefits to virtually all Bhopal  residents, but very few benefits accrue to residents of Jabalpur and even fewer benefits, if any, to residents of Kolkata. There are nonrival benefits from the police force in Bhopal, but they do not extend over the entire Indian population. Instead, the benefits are concentrated mainly on people living in or near Bhopal and diminish rapidly as one moves farther away. Such a public good, with benefits concentrated geographically, is referred to as a local public good, as distinguished from a national public good such as  national defense. Similarly, there are local externalities such as the pollution of a particular lake or stream. Note that whether a good is a local or national public good is really a matter of degree. Not all local public goods benefit only those who live in a specific locality (tourists in Aleppy may benefit from police protection in that locality), and not all national public goods benefit everyone in the nation (e.g. localized benefits derived from small wild life sanctuaries). Still, the benefits from some public goods are far more limited  geographically, and that is the essential point.

It is possible for different communities to provide different levels of output of local public goods. Because the preferences of residents are likely to vary from one community to another, a federal system of government makes it possible for consumption levels to vary with the preferences of residents. A community that wants (and is willing to pay for) a strong police force but no parks can have  such a pattern of services without interfering with another community that prefers the opposite pattern of services. Thus, a federal system is capable of greater efficiency than is a system that provides the same level of government services to all citizens. In  principle, a federal system of many sub-national governments is able to provide a range of outputs that correspond more closely to differing preferences among communities than could a national government.