Increasing the effectiveness of public finance in decentralized systems is a major challenge to both economic theory and practice. In broad terms, economic effectiveness means the relationship between the value of outlays incurred and the effects obtained thanks to these outlays. In the public finance sector, such calculations are difficult because the effects of operations in this sector are often impossible to measure. Studies of the effectiveness of local government finance in Poland tend to focus on a number of selected aspects, yet they rarely deal with the issue of effectiveness in the context of competition and payment for public services. The authoress describes the basic assumptions of two theoretical models known from research reports published abroad: a model developed by American economist Charles Tiebout and a theory proposed by Swedish economist Knut Wicksell. Both these theories deal with competition between local communities and the problem of preferential treatment with regard to public goods and payment for these goods. Even though these theoretical models have their limitations, both Tiebout and Wicksell point to the need to decentralize local finances. She presents different scenarios for income shocks in local government budgets, in both the centralized and decentralized systems. The theories described by the authoress are the basis for formulating certain recommendations related to the rationalization of local government finance, including more direct use of tax breaks for local taxpayers, the equivalence of burdens imposed on public institutions, and the need to counteract 'fiscal illusions'.
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