Various activities of the government are undertaken at different levels. To understand the assignment of responsibilities to the different levels of state, it can be beneficial to define, whether it is more useful to deal with problems at the local or the federal level. Public goods in general are goods that are neither excludable nor rival. For that reason, they are usually provided by the government. For some kind of goods, the benefits accrue to residents of a particular area or community. These are called local public goods. Examples of them are traffic lights or fire protection. In contrast, for national public goods, there is a presumption for federal provision, because their benefits accrue to everyone in the nation. An example is national defense. There are also some public goods, from which benefit people living all over the world. These are called international public goods, e.g. global environment. To be the supply of public goods efficient, national public goods must be supplied at national level, local public goods at local level, etc. If the provision of national public goods is left to local communities, there would be a freerider problem and there can occur an undersupply of those goods. Similarly, there is likely to be an undersupply of international public goods, if they are provided by the national governments. However, it does not exist any highest level of the government, which stands above national governments, which would be given responsibility for resolving global externality problems. The closest approximation to a global government is probably the United Nations General Assembly. On the other hand, it is beneficial, when local public goods are provided by local governments and not national. Charles Tiebout of the University of Washington argued that competition among communities ensures efficiency in the supply of local public goods, like it does a competition among private subjects in the supply of private goods. Competition between communities arises naturally, because if the citizens of the community do not like, how the public goods are provided to them, they can move to the other community, where they think the provision of public goods is better. Moving from one town to another is naturally much easier than moving to a different country. This argument is called
Tiebout hypothesis. The provision of local public goods by local governments is not always optimal and sometimes federal intervention may be required. The question of which activities should take place at which level of government is called optimal fiscal federalism. Reasons, why federal government might intervenes to the provision of public local goods include
market failures and redistribution. Market failures occur because actions of one community have effects on the others (externalities) and similarly as in the market with private goods, competition is not perfect, because there is always a limited number of communities. The problem of redistribution is that with free migration and local competition communities will not redistribute income (to individuals or between communities) or, at most, the redistribution will be limited. From this reason, redistribution is performed by the higher levels of government. == Grants ==