However, there have always been natural monopolies (such as water supply), coping with negative economic externalities (such as sewerage and solid waste management), the provision of whole or partial public goods (such as street lighting, or roads) and merit goods (such as education, health, and welfare), and services that the community, for economic or social reasons, seeks to subsidize (such as urban transport). Left to the private marketplace, these services would be absent, or under- supplied, or over-charged for. Such services are wholly or partially financed by local taxation, either imposed by local governments, or by central (or state) taxation, through a grant or revenue- sharing system. What has changed in recent years is that local governments have been encouraged and empowered to outsource these services to the private sector, or to "public-private" partnerships. Charges for services, and revenues from taxation cover current operating expenditures with a small operating surplus used to partly fund capital expenditure or to service long, or medium term debt, such as bond issues secured against future revenues. Commercial banks, because of their tendency to lend only for relatively short periods of time, usually have a relatively minor role in such funding, except perhaps as fiscal agents or bond issue managers. Other funding is obtained via direct - and dependence- forming - capital grants from the central or state government. Alternatively, the central government can establish a quasi-autonomous local government loans authority, which it may wholly or partially fund. The authority may also seek to raise additional funds from commercial sources and make loans on reasonable terms to the local governments. Third, the central government may lend directly to local governments, or guarantee their borrowing. Finally, local governments are left to their own devices to raise loans as and when they can, on whatever terms are available. This usually leaves them in a precarious position, because the market for this kind of long and medium term credit is thin and costly. Commercial banks make short term loans to local governments to cover temporary shortages of working capital. If not properly controlled, such short-term loans are rolled over and accumulate unsustainably. That is what happed in New York City, in the seventies. Q: In the age of the Internet and the car, isn't the added layer of municipal bureaucracy superfluous or even counterproductive? Can't the center - at least in smallish countries - administer things at least as well? A: I am quite sure that they can. There are many glaring examples of mismatches of sizes, shapes and responsibilities of local government units. For example, New York, Moscow and Bombay are each single local government units. Yet, they each have much bigger populations than many countries, such as New Zealand, the republics of former Yugoslavia, and the Baltic states.