This is something that I think changed between TOS and TNG. In TOS I get the impression that the Federation is more of a confederation or loose alliance of worlds. Oh, sure, there is this unifying body, but the member worlds exercise a lot of autonomy. Earth kept doing its own thing. Enterprise operated under the United Earth Space Probe Agency. Earth fought the Romulans and established Earth Outposts and colonies in space. Vulcans manned the Intrepid.
TNG retooled the Federation into a unified government under one president. It was now more "Federation this" "Federation that" as opposed to Earth.
As for how big can the Federation get before it collapses, well, that would depend on the cause of collapse, wouldn't it? In the past governments failed because they were unable to financially support their infrastructure or were unable to completely defend their borders from hostile intruders. In the 24th Century financial burdens seem nonexistent. Scarcity of resources seems to be a thing of the past.
Now, the defense of borders is a good thing to look at. As Timo (I think it was) pointed out in another topic, the Federation could still be the target of the Founders and the Jem'Hadar. That war was about as devastating as the Federation has ever seen. If there was ever a combined assault with the Founders and the Borg attacking the Federation simultaneously, then the whole quadrant could very well collapse due to the limits of ship deployment, resupply, etc...
Warp drive and FTL communications favor larger governments. The Old Republic and the Galactic Empire spanned an entire galaxy. With their (more advanced) FTL technology, they governed a larger area than the Federation and all Alpha Quadrant societies combined. It was internal forces that saw the overthrow of those two governmental systems.
Which leads us back to Timelord's "seditious speech" concept.