Assignment:
1. Suppose that Harvard is considering building new parking lots on campus. The table below shows the marginal benefit to students, faculty/staff, and visitors for one to five new lots. The table also gives the total cost of acquiring/constructing those lots. Assuming that the lots will not be completely full so that students, faculty/staff, and visitors can use them simultaneously, derive the aggregate demand curve or social marginal benefit for parking lots (show both a table and a graph). What is the efficient number of additional lots? Explain your answer. If Harvard builds the efficient number of lots, how should the cost be divided among students, faculty/staff, and visitors? Explain your answer.
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Marginal Benefits
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Number of Lots
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Students
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Faculty/Staff
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Visitors
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Total Cost
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1
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$75,000
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$37,500
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$12,500
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$30,000
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2
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$60,000
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$35,000
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$5,000
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$70,000
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3
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$45,000
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$30,000
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$0
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$120,000
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4
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$25,000
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$25,000
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$0
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$180,000
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5
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$5,000
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$20,000
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$0
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$250,000
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2. The following data depict the fiscal characteristics of two school districts in a metropolitan area, each composed of identical single family houses with one pupil per house. The voters who have chosen to live in both districts desire and select $10,000 of educational spending per pupil and collect property taxes to finance it. Because B has small (low value) houses, the tax rate in B is much higher than in A.
a. Would a voter in district B prefer to live in a small ($100,000) house in district A? Explain.
b. Suppose that there is a third school district to choose from with an equal number of big and small houses so that the average per pupil value is $150,000. What tax rate is required in this district to spend $10,000 per pupil? If small houses also cost $100,000 in this district, are consumers of small houses better off here or in B? Given your answer, what will happen to the prices of small houses in this mixed district?
c. Characterize the equilibrium that would allow all three districts to exist simultaneously. What does this imply about the equity implications of the Tiebout process?
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School District A
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Characteristic
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School District B
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$200,000
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Per Pupil Property Value
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$100,000
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$50
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Property Tax Rate (in dollars per $1,000 of value)
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$100
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$10,000
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Per Pupil Expenditure
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$10,000
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3. Suppose that it is proposed to create a single local jurisdiction and government for your entire metropolitan area or region, to be called Metroland. It would replace all cities and/or towns that currently provide basic local services (such as public safety, streets, and recreation services).
a. Make the economic case for this consolidation into a metropolitan-area government (there are at least three potentially favorable economic reasons).
b. Now suppose that you were hired as an economic consultant to advise about this change and your research uncovers four facts: (1) currently, there is a big difference in per capita spending among the municipalities to be consolidated, from $2,000 at the top to $500; (2) the variance in per capita income for people living in the area is relatively large; (3) there is a relatively small variance in per capita income within each of the municipalities; and (4) currently many of these municipalities contract with the county (or state) government to have some services (such as jails, emergency dispatch, and parks) provided. Do these facts support or argue against the proposed consolidation? Explain your reasoning for each factor.