In this chapter we demonstrate that in a federal system some programs that are ruled out by a generality constraint at one level of government may be permitted at another. A well-functioning federal structure of government can allow some departures from structure-wide uniformity while retaining the political efficiency advantage of adherence to the generality principle. Some services that fail to be sufficiently general at a more inclusive level of membership in political community may be acceptable at less inclusive levels of government or within smaller self-financing and autonomous service districts. A federalized structure of government can provide heterogeneous services while satisfying the strictures of generality.

The proponents of federal systems of governance have long touted the various efficiency-enhancing properties of decentralized political institutions. It has often been argued that federalism is a good solution to public service provision in cases in which ordinary economic efficiency requires nonuniform services across various regions of the country insofar as preferences, wealth, or circumstances vary significantly. Our generality defense of federalism is largely consistent with this conventional analysis, but it differs in approach and implication for assignment of tasks. Federalism allows generality to be adhered to at the level of every governmental body responsible for making collective program decisions while it allows departures from uniformity in the federation as a whole. Federalism allows political transactions costs to be minimized while realizing the advantages of locally heterogeneous service levels. In this sense, federal systems may be said to be a first-best institutional arrangement that produces outcomes that cannot be replicated even by an idealized democratic central government.