1. Demand for Local Public Goods
5520_l5_d_lpg
5/7/2018
Demand for Local Public Goods
© Allen C. Goodman 2008

2. 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?

3. Let’s recall a few things from principles
EY = % Q / % Y.
EP = % Q / % P.
Why do we care?
We’d like to know (if public goods are good) whether we might naturally get more of them if incomes rose.

4. Price elasticities
Things you once learned, but you probably wanted to forget!
How much does quantity demanded change if price changes?
What happens to total expenditures?
Suppose EP = 0.
0 = % Q / % P
If % P is 10, % Q = 0, so total expenditures  by 10% - that’s a lot!

5. Price elasticities Suppose EP = -0.5. -0.5 = % Q / % P
If % P is 10, % Q = -5, so total expenditures  by 5% - Why?
Suppose EP = -1.0.
-1.0 = % Q / % P
If % P is 10, % Q = -10, so total expenditures are unchanged - Why!
What if EP = -1.5? What happens to total expenditures?

6. Getting demand from median voter models
Suppose median income person is median voter.
Price
Trend Line YA
YB>YA
YC>YB
Quantity C*
tc(Yc) B*
tb(Yb) A*
tA(YA) A* B* C*
Quantity YA YB YC
Income

7. Getting demand from median voter models
Suppose median income person isn’t median voter.
Price
tc(Yc) YA
YB>YA
YC>YB
Quantity
tb(Yb) C* A* B*
tA(YA) B* A* C*
Quantity YA YB YC
Income

8. Conundrum
If the first is the case, we can confidently regress median income against median expenditure and feel that we have identified the median voter.
If the second is the case, we cannot be sure.

9. How do we examine data
Let’s look at some data on per capita state/local expenditures v.
Per capita state income

10. Let’s draw a picture What does the relationship look like?
Looks like as income  expenditures .

11. Log-log Form Good thing – Elasticities are easy to calculate
Bad thing –
1. Elasticity is constrained
to be constant
2. What do you do with 0’s?
Goodness
of fit
Elasticity

12. Linear Form Good thing – Elasticities can vary. Bad thing –
1. Elasticity must be
calculated.
E = (DPCE/PCE)/(DPCI /PCI)
E = (DPCE/DPCI)*(PCI /PCE)
E = (0.161)*(PCI /PCE)

13. Empirical Work Bergstrom/Goodman (no relation) – 1973
Already kind of dated but Fisher argues that more recent stuff is similar.

14. General Literature
As income rises, quantities rise, but not by as large a percentage. Implies that expenditures rise.
As price rises, quantities fall although not by much. Also implies that expenditures may rise.

15. Business Demand
Model is one of consumer demand but how do businesses feel?
Application 4.1 is interesting
On the one hand, businesses always seem to want lower taxes.
On the other hand,
“without additional revenues, Colorado will be left with little choice but to woefully under-fund areas such as higher education, our state highways, water resources, and vital capital construction and maintenance projects.”