Review and the hits just keep on coming

Review … and the hits just keep on coming

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

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. . . 1 2 3 4 Schools • Suppose another politician promises s 2. Person 3 won’t be happy 60 anymore because you’re s 1 providing MORE school s 2 resources than he wants … so he’ll vote against it. s 3 • KEY POINT !!! The s 4 median voter is decisive. Eq’m school will be at s 3. s 5 Each voter will pay 60 b 3 in taxes and get s 3. 5 b 3 Bread 60

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? EY = % Q / % Y. EP = % Q / % P.

occurs when people stop moving! Tiebout Eq’m 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. What a happens if people keep moving tax person. From Community 1 to Community 2? • We get an equilibrium. People’s preferences are satisfied.

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?

Privatization Think of some of your own examples! • Definition: Transfer production of government services to private firms. Degrees of Public and Private Involvement Case Choice Financing Production 1 2 3 4 Public Private Public Private Example Police Trash Sidewalks Private Goods 10

Impacts of Grants – General v. Matching All Other • Suppose, instead, you were given a matching grant, where every $ you raised would be matched with a $ from the government. • Slope is now -0. 5. Why? Slope = -0. 5, why? A 2 A 1 • Leads to much more E and relatively less A. E 1 E 2 E 3 Education

Fungibility • You have a budget of $60 per week for entertainment. You spend: – $20 on Pizza – $20 on Movies – $20 on Pepsi • Your parents come to visit and give you a $30 gift certificate to Pizza Hut.

Taxes and Efficiency • Excise Tax – Tax on a particular good. – Look at a unit (as oppose to percentage) tax. D S $ P 1 Con. P 0 3. 0 $1 Prod. DW • $1 Tax Collected on DEMANDERS What’s DW$ Q 1 Q 0 Q

Ad valorem tax on supply • Tax parameter is , so if there is a 10% tax, = (1+tax) = (1+0. 10) = 1. 1 • Impose on Supplier • Supply – Why? Price Supply c Ps´= a + b Qs Demand TAX • Demand DW Pd = c + d Qd If we set Ps´ = Pd, then aα a Q** Q* Quantity

Ad valorem tax on demand • Tax is , so if there is a 10% tax, = 1. 1 • Impose on Demander • Supply Ps = a + b Qs Price Supply c Demand c/α TAX • Demand DW Pd´ = (c/ ) + (d / ) Qd If we set Ps = Pd´, then a Q*** Q* Quantity

Proposal A in Michigan

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. 17

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 to make revenue constant and it decreases DWB by more than DWA increased. DA $ Price B CS loss ↑ DB 1+t + t. A 1 RA 1+t - t. B 1 Good A RB CS loss ↓ Rb’ DWB Good B

Is it a prisoner’s dilemma Southfield • Do we give 50% tax abatement? • In boxes we have total expected tax receipts for the municipalities. No Yes No TS = 2 M TW = 2 M TS = 2. 5 M TW = 0. 5 M Yes TS = 0. 5 M TW = 2. 5 M Warren TS = 1 M TW = 1 M 20

Elasticities A Little! • Elasticity of intermetropolitan business activity (A) with respect to local tax [(DA/A)/ (Dt/t)] varies between -0. 1, and -0. 6. • Elasticity of intrametropolitan business activity with respect to local tax varies between -1. 0, and -3. 0. • Why are they so different? A Lot!!

Compare Education to Health

GTB Formula (and worksheet) Consider a formula of the type: Gi = B + (V* - Vi) Ri, where: Gi = 0 + ($200, 000 – $50, 000) ($40/$1, 000), where: Gi = grant B = Basic or Foundation Grant V* = Guaranteed per-pupil tax base Vi = Per pupil tax base in district i. Ri = Tax rate per thousand dollars in district i. Gi = $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.

What’s the most cost-effective place? Highest mean! 30 Mean = (20+0)/2 = 10 • Thought experiment. Most cost effective Ed place is where we get the highest mean score. Why? • We can draw a line with a slope of – 1. This line gives us places with equal totals. Start with S = SE + SH = 10. SE+SH= max 45 o SE+SH=20 Mean = (8+8)/2 = 8 SE+SH=10 10 Mean = (0+10)/2 = 5 10 20 Harry

Ideas for Study It’s all about quantity. How do we calculate Q*? What happens if we’re not at Q*? Know what an elasticity is. Elasyx = % Δ y / % Δ x. From a regression, y = bx Elasyx = b (mean of x/mean of y) Who pays the tax? Depends on the elasticity. 25

Ideas for Study (2) Know what a regression is! If y = a. X + c. Z a! what is the impact of a change in X, or a change in Z? c! Current events count! Look at them! 26

Ideas for Study (3) • Capitalization! • If asset rents for $R per year, its value is: – V = DR, where D = 1/r (r = interest rate) • If same asset rents for $R per year, but owner must pay t% tax, – V = DR – t. DR – V = DR/(1+Dt)

Ideas for Study (4) • Capitalization! • If asset rents for $R per year, its value is: – V = DR, where D = 1/r (r = interest rate) • If property tax t pays for public good X, then: – Vbig = D(Rbig + X)/(1+Dt). Big houses are worth less. – Vsmall = D(Rsmall + X)/(1+Dt). Little houses are worth more.

Final Exam • The final exam, as noted in the Winter course schedule will be: – Monday, April 28, 2014 from 10: 40 am to 1: 10 pm.

… and remember Good Luck