NCPA - National Center for Policy Analysis


April 21, 2006

The privatization of local government since the 1960s is likely to mark a return to the local independence that characterized the West before the rise of the modern nation-state, says Robert Nelson of the University of Maryland.

Indeed, for hundreds of years, the corporate legal status of a municipality -- often no bigger than a neighborhood -- successfully limited attempts by higher levels of government to infringe on local prerogatives. Then, in 1867, Iowa judge John Dillon ruled that state governments supersede local municipalities.

However, because modern municipalities -- such as neighborhood associations -- closely resemble businesses, the federal government should treat them as such by leaving them alone, as they do businesses.

How do municipalities resemble businesses? According to Nelson:

  • Federal funds mainly go to national defense and the redistribution of income, but local governments perform services such as picking up garbage, policing the streets and running the schools (and most of these services could be, and often are, provided privately).
  • The property owner in a municipality, such as a neighborhood association, is not only a customer, but an investor -- indeed, his home often constitutes a significant portion of his total financial assets.

If higher levels of government shifted power to local governments, the state and/or federal governments could mediate between neighborhoods as needed. Where communities become involved in direct service provision, the role of higher-level government would most likely involve arterial highways, water systems, sewer systems, and other services that require coordination across wide geographic areas and involve major economies of scale.

Privatization of municipalities would permit groups of people to form their own unit of local government and thus obtain the collective services they want without exorbitant transaction costs.

Source: Robert H. Nelson, "Welcome to the New -- and Private -- Neighborhood," Reason, April 2006.

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