The effectiveness of the "county-based" system of basic education fiscal expenditure depends on the balance between expenditure externalities and preference heterogeneity.

The main reasons for the externality of expenditure include spillover effect and competition effect, both of which make the county-level financial expenditure on basic education deviate from the efficiency level. However, the nature of their expenditure interaction is different: the former is the substitution of expenditure, and the latter is the competition of expenditure. Based on the panel data of county-level finance, it is found that there is a significant negative correlation between the financial expenditures of basic education in adjacent counties, which shows that spillover effect is the leading factor to produce the externalities of basic education expenditures. In order to correct the low financial expenditure of basic education, higher-level finance should bear more responsibility for basic education expenditure.