The economic case against mergers: The idea that larger municipalities save money with economies of scale is largely a myth

Despite strong local opposition, the Quebec government has forged ahead with its ambitious municipal reorganization. On January 1st, 2002, the 28 municipalities on the island of Montreal will be amalgamated into a single city divided into 27 boroughs. Elsewhere in the province, dozens of other municipalities have also been forced to merge.

However, the debate over the merits of this reorganization continues. First, because, in the political field, the Liberals have taken a stand that would allow a de-merger in cities where a majority of residents wish to do so. Second, because economic theory and data lead to a precise conclusion: that citizens are better served in urban regions that have numerous small municipalities than in those dominated by only one or a few.


The current mergers are likely to arouse dissatisfaction and disappointment when the anticipated benefits do not materialize. This can already be seen happening in Toronto and in Halifax, and it still can be seen in New York City more than a century after the amalgamation there (the last one in the United States similar to those now being implemented in Canada).

In 1956, Charles Tiebout published the first explanation of the link between high citizen-satisfaction levels and a large number of local jurisdictions in a now celebrated article. According to Tiebout, a resident has little influence on the range and quality of local services (roads, police, fire brigades, parks, libraries, etc.) offered in his municipality, or on the price that he pays to obtain them.

As public goods, these services are not sold in the same way that consumer goods are on the market. A citizen can, of course, try to influence his councillor into implementing his desires, or he can vote for someone else in the next election, but he will only be satisfied if a majority in his community agrees with him.

Tiebout, however, showed if there existed, in a given urban region, a large number of small municipalities, people could “vote with their feet” by moving to cities that offer the optimal level of public services.

Some people would be prepared to pay higher taxes to obtain better services, others would prefer fewer services at lower cost. Some cities would emphasize industrial development and job creation, others would provide more greenery and leisure activities and still others would specialize in family services.

Citizens would be able to choose the community which is most suitable to them – just as they can have better choice in a competitive private market, where different products are on offered, than in a market dominated by a single provider. Every municipal entity will be under pressure to satisfy the needs and desires of its citizens, because it would be subject to the competition of nearby cities. In order to remain prosperous and to keep or attract residents, it would have to be more efficient in the provision of services and less greedy when setting taxation levels.

No competition

Tiebout offers a good explanation of why large administrations that face little competition will tend, over time, to become bureaucratic, as well as why they will show themselves to be more responsive to the demands of pressure groups and municipal employees’ unions than to their electorates.

Reducing costs nevertheless remains a major argument for those who support mergers. In her White Paper on municipal reorganization in April 2000, the Municipal Affairs minister declared the merger of municipalities makes it possible to offer better services by eliminating duplication and through economies of scale.

But one of the most tenacious myths that surround this issue of cost is reducing the number of mayors and councillors from small suburban municipalities can mean important savings. These expenses are not only marginal, they do not necessarily decrease in merged cities.

In a C.D. Howe Institute study, Robert L. Bish compared the costs of 88 elected representatives and their staffs in 13 administrations, with those of 23 representatives elected within a merged administration serving the same population. He concludes the per capita costs, in both cases, counted for less than one per cent of total spending. Not only that, because of the higher salaries and the more numerous staff in the merged city, the per capita costs in both systems were practically identical.

No savings

Empirical research shows economies of scale are negligible when it comes to municipal services. They can be achieved only for very specialized services, such as murder investigations, or for those that require important capital investments, such as water-treatment plants.

Agreements between municipalities already make it possible to realize these potential savings without compromising the autonomy of the participating municipalities. In the case of Montreal, the Montreal Urban Community already administered these services, so the merger will make no difference.

Professor David Sjoquist of Georgia State University has looked at operating costs in 48 metropolitan regions of the southern United States and observed the costs of services are smaller in regions that contain numerous small municipal administrations. Furthermore, Professor Jacques Desbiens of the Université du Québec à Chicoutimi has argued for the majority of municipal services, economies of scale are already in place even in cities of very small size.

Bish further concludes there is overwhelming evidence the least expensive local governments are found in small- and medium-sized municipalities that also cooperate in providing services.

Another important reason used to justify the mergers is that of the fiscal disparities that exist between municipalities of the same urban area and the need to establish equity between rich and poor districts. This argument does not hold water for several reasons.

MUC does it now

First, on the issue of financing regional equipment, the MUC already acted as a mechanism for sharing costs for the entire island of Montreal. If the goal were to simplify the structures and to include off-island suburbs in this cost sharing, expanding the territory covered by creating the MUC would have been enough; there was no need to amalgamate the municipalities of the island.

Also, besides having a system of “progressive” taxation, the federal and provincial governments already devote billions of dollars to various social programs. It is absurd to upset municipal administration in order to add an additional mechanism to transfer wealth. In any case, if the mergers were really a solution to regional inequities, all the municipalities of the region would then have to be included in the new city, including Laval and the prosperous suburbs of the north and south shores, and not only those of the island.

Finally, as is the case for federal equalization payments and other regionally based wealth-transfer programs, redistributionism often creates a vicious cycle whereby underdevelopment is being fostered instead of being eradicated. Wrong incentives lead local decision makers to try to obtain a larger slice of the redistributed funds instead of improving the competitiveness of their region. Small municipalities, which have to count on their own means to prosper, do not have this option and, thus, tend to make better decisions.

Dynamic urban regions as different as Silicon Valley, Boston, Houston and Dallas were able to prosper with very fragmented municipal administrations. No empirical link between the centralization of decision-making authority and international competitiveness has ever been established by researchers.

The ideal of having a region “speak with one voice” is doubtless relevant when it comes to lobbying higher levels of government or international organisations to obtain subsidies, projects or prestigious events. But it has no effect on what matters above all for the prosperity of a city, namely the dynamism of its private sector economy. For this, the quality of basic services and competitive taxation levels are the major factors.

The forced mergers, in Montreal as in the other urban areas of Quebec, are the wrong remedy for a badly diagnosed problem.

Break it up

In the new City of Montreal, 18 boroughs correspond to the territory of the former 27 suburban municipalities, while the ancient City of Montreal by itself gets nine boroughs. This geographic apportionment points to an alternative solution to solve the problems of the central city: its division into several smaller municipal entities.

Increasingly, this is indeed what city dwellers fighting for urban renewal in the United States have been doing. In New York, Los Angeles, Miami, Houston, Atlanta and in other American cities, citizens’ movements resist the expansion of central cities, advocate the incorporation of new municipalities in the surrounding districts and even try to detach districts belonging to big cities.

Rather than expanding cities, we should break them up into an array of independent, neighbourhood-based governments that would set their own property-tax rates, elect their own officials, and give city residents the same control and sense of community that their suburban counterparts take for granted.


Michel Kelly-Gagnon is President of the MEI.

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