Review … and the hits just keep on coming

Consumer and Producer Surplus in the Market Equilibrium Copyright©2003 Southwestern/Thomson Learning Producer surplus Consumer surplus Price 0 Quantity Equilibrium price Equilibrium quantity Supply Demand A C B D E

Public Goods Most important factor is that everyone gets the same amount. We have to get some agreement as to how much we’ll want (we’ll discuss that a lot). We’ll have to get some agreement as to how to pay for it (we’ll discuss that a lot, also). Sum of Marginal Benefits = Marginal Cost

If you don’t believe me Bread Schools Suppose another politician promises s 2. Person 3 won’t be happy anymore because you’re providing MORE school resources than he wants … so he’ll vote against it. KEY POINT !!! The median voter is decisive. Eq’m school will be at s 3. Each voter will pay 60 - b 3 in taxes and get s 3. s1s1 s2s2 s3s3 s4s4 s5s b3b3

How Responsive are LPGs? What are the usual suspects? We get pretty interested in both price and income elasticities. Presumably, as Income , Q . Presumably, as Price , Q . How much is it? –A little? –A lot? E Y = %  Q / %  Y. E P = %  Q / %  P.

Tiebout Model Assumptions –Jurisdictional Choice -- Households shop for what local governments provide. –Information and Mobility -- Households have perfect information, and are perfectly mobile. –No Jurisdictional Spillovers -- What is produced in Southfield doesn’t affect people in Oak Park. –Community size – City manager seeks to reach average minimum cost of producing goods. –Head Taxes -- Pay for things with a tax per person. We get an equilibrium. People’s preferences are satisfied. Eq’m occurs when people stop moving! What happens if people keep moving From Community 1 to Community 2?

Plethora of Studies If you do a citation search, you will find that this article was like Helen of Troy, the face that launched 1000 ships. All kinds of follow-ups. –Was this really what Tiebout meant? –Was the econometrics right? –Did this work at the individual house level, as opposed to the community level?

Instability Tax financing generates inherent instability. Need not be solely property tax. Happens with any tax other than a pure benefit tax or a head (per/person) tax. Incentive for one family to move to take advantage of fiscal surplus will lead other (or all) families to move.

Baumol’s Cost Hypothesis Consider two sectors. He calls them –Progressive – subject to productivity improvements. –Traditional – Generally more labor intensive and not subject to productivity improvements. What happens?

10 Degrees of Public and Private Involvement CaseChoiceFinancingProductionExample 1PublicPublicPublicPolice 2PublicPublicPrivateTrash 3PublicPrivatePrivateSidewalks 4PrivatePrivatePrivatePrivate Goods Privatization Definition: Transfer production of government services to private firms. Degrees of Public and Private Involvement CaseChoiceFinancingProductionExample 1PublicPublicPublicPolice 2PublicPublicPrivateTrash 3PublicPrivatePrivateSidewalks 4PrivatePrivatePrivatePrivate Goods Think of some of your own examples!

Impacts of Grants – General v. Matching Suppose, instead, you were given a matching grant, where every $ you raised would be matched with a $ from the government. Slope is now Why? Education All Other Slope = -0.5, why? E1E1 A1A1 Leads to much more E and relatively less A. E2E2 A2A2 E3E3

Fungibility P. 211 has a good example. You have a budget of $30 per week for entertainment. You spend: –$10 on Pizza –$10 on Movies –$10 on Pepsi Your parents come to visit and give you a $20 gift certificate to Pizza Hut.

Taxes and Efficiency Excise Tax –Tax on a particular good. –Look at a unit (as oppose to percentage) tax. $1 Tax Collected on DEMANDERS $ Q DS Q0Q0 P0P0 What’s DW$ P1P1 Q1Q1 Prod. Con. DW $1 3.0

Proposal A Proposal A in Michigan

15 Property tax … what do we have? The tax differentials between jurisdictions function as excise taxes (if there is a “national” property tax of 2%, then a jurisdiction w/ taxes of 3% will incur excise tax effects). The overall weighted property tax functions as a national tax on capital and land.

Is Property Tax Progressive, Regressive? This has long been debated. The “traditional” view was the property tax as an excise tax. If so, it is passed forward to the purchasers of the goods that are produced. If this is the case, it might be thought to be regressive. Why?

Optimal Sales Tax Analysis We could be more efficient if we could raise same revenue with less DW loss. How can we do that? Raise tax on A so price ↑ by 1%. This leads revenue to ↑ by a lot, and quantity to decrease by a little so DW ↑ by a little. Reduce tax on B (more than 1% - why?) to make revenue constant and it decreases DW B by more than DW A increased. Good A $ Good B Price B 11 DADA DBDB RARA RBRB DW B CS loss ↑ CS loss ↓ Rb’Rb’ 1+t +  t A 1+t -  t B

18 Is it a prisoner’s dilemma Do we give 50% tax abatement? In boxes we have total expected tax receipts for the municipalities. NoYes No Yes T S = 2M T W = 2M T S = 2.5M T W = 0.5M Warren T S = 1M T W = 1M T S = 0.5M T W = 2.5M Southfield

Elasticities Elasticity of intermetropolitan business activity (A) with respect to local tax [(  A/A)/ (  t/t)] varies between -0.1, and Elasticity of intrametropolitan business activity with respect to local tax varies between -1.0, and Why are they so different? A Little! A Lot!!

GTB Formula (and worksheet)worksheet Consider a formula of the type: G i = B + (V* - V i ) R i, where: G i = 0 + ($200,000 – $50,000) ($40/$1,000), where: G i = grant B = Basic or Foundation Grant V* = Guaranteed per-pupil tax base V i = Per pupil tax base in district i. R i = Tax rate per thousand dollars in district i. G i = $6000; own effort = $2000 If you raise R by $1 in your district, it is raised by (V* - V)/V times; Here (200 – 50)/50. So a $1 tax gets a $3 match. Implicit tax price = 1/(1+3) or 25%. Let’s look at spreadsheet.spreadsheet

What’s the most cost-effective place? Thought experiment. Most cost effective place is where we get the highest mean score. Why? Ed Harry 45 o We can draw a line with a slope of –1. This line gives us places with equal totals. Start with S = S E + S H = 10. S E +S H =10 S E +S H =20 S E +S H = max Mean = (0+10)/2 = 5 Mean = (8+8)/2 = 8 Mean = (20+0)/2 = 10 Highest mean!

Labor Migration wage Labor force Demand Supply Michigan Labor force Demand Supply Elsewhere LMLM wMwM LELE wEwE w M > w E. This implies that people will move from E to M

23 Transportation System Our roads – they suck. Why? –We don’t spend enough –We abuse them We allow VERY heavy trucks We under-fund them –Weight isn’t the only thing – Contrast a heavy oriental carpet with 4 inch high heeled shoes. We talked about this a little bit before

24 “Take-up” and “Crowd-out” What are the net impacts of social insurance program implementation? Are people who are now insured, previously uninsured (take-up), or are the new programs simply crowding out other forms of insurance?

… and remember Good Luck