Volltext: Very small countries: economic success against all odds

signation (production and provision costs) when the public good in con- sideration is produced in-house. The provision costs of a public good are, however, relevant for political decisions.17 Modern jurisdictions, be they federal or local governments or even municipalities, provide a wide range of goods for their inhabitants. Some of them are more or less private, some exhibit a considerable degree of publicness, and some of them are pure public goods. Theo re tically, every provided good, apart from the private ones, requires its appropriate or optimal jurisdiction size in order to minimize production costs.18Frey (1997) attempts to operationalize the concept of (flexible) jurisdiction size, depending on, among other factors, cost-optimality for different public functions, with his conception of so-called 
FOCJ.19 2.3.2 An appropriate definition of size Governments have to cope with problems arising from diseconomies of scale.20It is obvious that the larger a jurisdiction, the less diseconomies of scale pose a problem, since the jurisdiction will reach or exceed opti- mal scale of production for most of the goods provided.21 Hence, it goes without saying that diseconomies of scale seem to be an existential problem for VSC from a theoretical viewpoint. Due to problems associated with economies of scale, the provision of public goods is one of the most important challenges for VSC, at least when we define public goods broadly by including intangible public goods like, e.g., security, sovereignty and representation in international politics and economics. 30Smallness 
of countries: concepts and definitions 17The economic consequences of a differentiation between provision and production costs for VSC have been laid out in detail in Gantner and Eibl (1999). 18Note that there are a lot of local public goods which do not show considerable de- grees of publicness according to empirical studies. For an overview see Reiter and Weichenrieder (1997); the classic papers are Borcherding and Deacon (1972) as well as Bergstrom and Goodman (1973). 19FOCJ = functional, overlapping, competing jurisdictions. 20Marshall (1922) introduced this term to the literature. It means that one is providing goods on an inefficient scale, thus qactual< qefficient. 21Note that in the case of a larger jurisdiction, e.g., over-usage, congestion and hetero- geneity, costs pose considerable problems. However, we do not consider these phe- nomena for the moment and assume that it is possible for larger countries to simply establish more than one provision agency in the case of qactual> qefficient.


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