Should we favor large metropolises over small communities?
According to standard economic theory, the answer is yes, since centralizing helps reduce expenses. However, when public authorities lack some of the relevant information, opting for a federal structure that allows redistribution between many small towns may be the way to go. Researchers Nicolas Gravel and Michel Poitevin demonstrate this by studying the distribution of public and private goods in both federal and centralized structures.
How should the public goods be distributed? Ideally, centralization is preferable, as it reduces costs while maintaining individualization of taxes and common property.
When there is only one city, unlike an ideal world where taxes and quantities of public goods can be individualized, the public authority cannot differentiate between the wants and needs of individuals. It lacks information about individual preferences.
When there are two cities, the inhabitants divide themselves into the two cities according to their means and preferences. There can be two different levels of taxes and public goods with redistribution.