The Economics of Amalgamation

Small municipalities in Nova Scotia are asking tough existential questions. Earlier this year three towns voted to dissolve within a five week window: Springhill, Bridgetown, and Hantsport. Hantsport’s decision came as surprise, given their relatively healthy municipal finances, but as one supporter of the motion put it, the decision to amalgamate represented a “forward-looking” and “strategic” choice for the councilors. The trends foreseen by Hantsport come down to basic economics. In particular, two interrelated economic concepts stand out to explain why so many of Nova Scotia’s small towns are facing increasing cost pressures.

Economies of Scale

The kind of services provided by municipalities are all subject to economies of scale to varying degrees: as the scale of service grows, average or per capita costs fall until reaching a sweet spot, beyond which more scale creates rising average costs. Economies of scale are key to understanding the differing levels of market concentration by industry, and is similarly applicable to analyzing the size and concentration of political units.

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A simple way to demonstrate economies of scale in municipalities is to look at how per capita costs of basic services differ depending on scale. For example, providing a town in Nova Scotia with police and fire services, along with other administrative and counsel expenditures, costs on average $683 per capita annually. Scaling these same services up to the county level reduces the per-capita costs of every category, and cuts the annual total nearly in half to $350 per capita. Costs begin to rise again for CBRM and HRM, but never reach the highs of the town average.

These trends align with the academic literature on the subject. Most studies of Canadian municipalities find that economies of scale are mmaximized for police and fire services between a population of 20 and 50 thousand. Out-migration is, therefore, especially damaging to towns below this population range.

The Cost Disease

The cost disease is a concept that was first observed in connection to the arts. The economist William Baumol noted that musical performers were becoming more and more expensive to hire, despite little to no improvement in their productivity. One had to pay more in order to entice the musically skilled away from high productivity growth sectors of the time, such as manufacturing.

The cost disease is a defining feature of our times, as creeping changes in relative cost, and in particular rising costs of labour, force old practices and structures to break down. For instance, having home servants was once commonplace, but today is associated with luxury. For a similar reason, it’s often cheaper to buy a new home appliance than to call in a technician. In schools, teacher salaries continue to rise without matching productivity growth, too, leading to the infeasibility of the small school model and driving organizational consolidation.

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Residential Tax Burden = Total residential tax revenue ÷ Total dwelling units

The cost disease leads to similar consolidation pressures for municipalities. Nova Scotia’s municipal districts tend to have the fastest growing residential tax burdens for two reasons. First, relative to towns, they have smaller tax burdens to begin with, so a given increase implies a faster growth rate. In absolute terms, towns have the largest tax burdens by a long shot. Second, municipal districts have more mandatory expenditures, such as the education contribution, that they have little control over.

There are no short cuts to fighting the cost disease. The options can be grouped into two types: we can either accept much higher proportions of GDP going to cost diseased areas or we can find ways to adapt to changing cost structures by restructuring organizations, boosting labour productivity and finding labour-saving technologies.

Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Uber, Economic Regulation, and the Open Market

In municipalities throughout Nova Scotia, as is the case across much of the Western world, local councilors are responsible for regulating the taxicab industry. This process primarily entails controlling prices and restricting licenses, as well as implementing safety regulations. Technological innovation, however, is changing the taxicab industry and governments have failed to heed the improvements brought by it.

Upon moving to Halifax in 2010, I noticed that taxicabs didn’t offer debiting services; in 2014, nearly every taxicab in the city provides this service. Halifax may be unlike other “big cities” in Canada, yet, technology available in Toronto, Montreal, and Vancouver is available here. To attract and retain consumers, i.e. riders, taxicab drivers must offer good services in return for the price they charge. In The Road to Serfdom, for instance, Friedrich Hayek argued, “Our freedom of choice in a competitive society rests on the fact that if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist, we are at his absolute mercy.”

The law of supply and demand suggests that the price for any given product will be variable until quantity demanded by consumers matches quantity supplied by producers, at which point there is equilibrium and all markets “clear.” This law does not apply strictly to the taxicab industry, where government controls the price of taxicab services and regulates the entry, and, therefore, “supply,” of drivers: restricting the supply of drivers creates excess demand for them, and this excess demand places upward pressure on the price of their services. Consumers, many of whom rely on taxicabs as their primary mode of transportation, absorb the rising costs of ineffective taxicab regulation.

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Taxicab drivers in Nova Scotia operate in a “non-market economy,” wherein government intervenes in the process of allocating goods and resources and determining their prices. This intervention creates a deadweight loss: “A buyer would be willing to buy the good at a price that the seller would be willing to accept, but such a transaction does not occur because it is forbidden by the quota.” Economic regulation of this type results in a net loss for consumers: “In every case in which the supply of a good is legally restricted, there is a wedge between the demand price of the quantity transacted and the supply price of the quantity transacted. This wedge has a special name: quota rent. It is the earnings that accrue to the [taxicab licensee] from ownership of a valuable commodity.”

In an open market, competition between drivers would place downward pressure on the price of their services and consumers would reap the benefits. Moreover, competition compels taxicab licensees to vie for consumers by offering better services, which results in a more robust and efficient market, whereas in the absence of market dynamism, the incentive to innovate is very low (or nonexistent).

Restrictive regulations in the taxicab industry, combined with the advent of technology, have resulted in emerging markets that fall outside the purview of economic regulation. Uber is a prime example.

Arriving in Halifax this past summer, the Chronicle Herald welcomed Uber with the headline, “Controversial Uber car service starts up in Halifax.” Uber provides a car-for-hire service similar to taxicab companies, however, its operations are unregulated due to “laws [that] weren’t written to account for technology that exists today.” One of the primary reasons that governments pursue economic regulation is to compensate for “information asymmetry,” but Uber provides a solution to this problem: it uses a rating system that gives consumers pertinent information about their driver. In other words, Uber is a product of competition and the company’s innovative model benefits drivers and riders. Perhaps it is time for governments across Nova Scotia to consider whether deregulating the taxicab industry and using a model similar to Uber’s would benefit consumers.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Amalgamating Localities as a Means of Promoting Efficient Governance

New Brunswick’s (NB) system of local governance, implemented in the 1960s under the Robichaud government’s equal opportunity programme, dissolved the existing county system and replaced it with one that focused on the province’s many cities, towns, and villages. This left rural areas largely unincorporated and, since then, NB’s municipal structures have remained unchanged (other than a few forced amalgamations).

Although the rationale to dissolve the county system in the 1960s was defensible, NB has since failed to modernize its municipal system in a way that better equips local governments to deal with contemporary challenges. The infamous 2008 Finn Report on local government, for instance, noted that many of the problems associated with municipal politics–particularly, the existence of too many municipalities, local service districts, rural communities, and taxation authorities (over 400 in total)–led to a duplication of services and infrastructure and resulted in a lack of fair cost sharing between municipalities. The report also found that it led to a poor allocation of provincial and federal funding.

An example of the headache caused by NB’s multiple municipal structure is the South-East Region, otherwise known as the Westmoreland and Albert counties. The region hosts two cities, three towns, nine villages, and a rural community. In addition, it is home to four local service districts and a regional service commission.

The Finn Report notes that, since 1967, there have been over 25 studies analyzing municipal governance. It identified a lack of progress in regards to reorganizing municipalities, other than some piecemeal developments in taxation policy and policies regarding unconditional loans and grants. The report recommended dissolving all local service districts, villages, towns, and rural communities and transforming them into larger entities. In addition, the report suggested amalgamating cities and their surrounding rural communities.

Indeed, many other jurisdictions have undergone similar restructurings in Canada, such as the creation of the Halifax Regional Municipality (HRM) in Nova Scotia. A body like HRM, which is an amalgamation of Halifax, Dartmouth, and the surrounding areas, prevents service duplication and ensures fair cost sharing. Consider the advantage for an area like Saint John, surrounded by suburbs. Currently, the city is on the hook for infrastructure cost within its limits, which everyone within the commuter-shed uses. In addition, the several towns and the city duplicate services in the area, such as policing and sewers. Regional cooperation would eliminate these problems.

The most common criticism of the “regional municipality” model is that rural areas and towns will risk having their voices diluted by the larger cities with which they forge. While this does pose a serious threat for smaller jurisdictions, they generally have little influence over local governance under the current system. Local service district boards are unelected and many rural areas do not have the population to justify the expense of operating as a village or rural community. Merging with larger townships, however, affords rural areas with representation on municipal councils and, therefore, greater representation in local affairs. Preserving the community’s identify could also be achieved through the creation of community councils.

In conclusion, NB needs local governance reform as the current system is outdate and has failed to keep pace with the rest of the country. Attributed to the shortcomings of reform is political will, as municipal changes have proven unpopular in past times. NB’s dispersed population and language divide worsens the issue. (Consider an area like Moncton and Dieppe, where city limits also serve as the separation of language communities.) Ultimately, the province must work around these obstacles in order to achieve a more efficient local government.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute