ABSTRACT
This chapter considers efficiency and equity as two reasons for the existence of such a system. It considers funding methods by which higher levels of government can affect outcomes at lower levels. Economists tend to view federalism in somewhat more narrow terms as fiscal federalism, or the allocation of economic functions among levels of government. In particular, they are interested in the effects of various fiscal incentives on resource allocation and income distribution at lower levels of government. Fiscal federalism has been one of the oldest and best-established areas of collective choice involving government. The conventional wisdom, largely formalized several decades ago by Musgrave and Oates, has been that the federal government should be responsible for distribution and stabilization. The traditional advice of economists has been on how federal, state, and local government should share responsibility for resource allocation and how intergovernmental grants should be designed.
