1. Stan runs a bed and breakfast (B&B) in a typical mountain village in Austria. The town has just passed a thirty euro per night tax on all tourist guest rooms in the village to be paid by owners of accommodation.
a) Given that the village is similar to many other villages, do you think Stan will be able to pass the tax through to his customers in the form of a price increase in the short run? Explain your answer with reference to the elasticity of supply and demand for rooms. Draw a graph illustrating your answer.
b) Suppose that Stan decides that he cannot raise prices. Will he be able to pay for the tax by lowering the wages of his workers? Explain your answer with reference to the elasticity of supply and demand for the labor of B&B workers.
c) Suppose that Stan rents the building and land that houses the bed and breakfast. Who is likely to pay the tax if Stan can easily move the B&B, Stan or the owner of the land?
d) What are the implications for the number of tourist rooms in the town in the long run (the time interval over which capital and labor are fully mobile)? Explain your answer with respect to what "fully mobile" capital and labor implies about the relative elasticity of supply and demand for guest rooms in the long run. Draw a graph illustrating your answer
e) How might your answer to d) differ if the town were next to the best ski terrain in the country? Draw a graph illustrating your answer.
2. For which group of workers is the substitution effect associated with a tax increase more likely to outweigh the income effect: primary earners or secondary earners? Explain.
3. Read March 11, 2014 NYT article "A Relentless Widening of Disparity in Wealth"
a) Why does Piketty think that income inequality will continue to grow throughout the rest of the 21st century?
b) Why wouldn't equal access to education undo the rising income inequality?
4. Read April 16, 2012 NYT article, "For Two Economists, the Buffet Rule is Just a Start"
a) What do Piketty and Saez suggest to undo the widening inequality in income and wealth?
b) Why do some economists think this is bad idea? How do Piketty and Saez respond?
c) Explain the role of the elasticity of labor supply for high earners in this debate.
5. "Why Shouldn't Princeton Pay Taxes"
a) What's the economic rationale for Princeton to receive a tax break? What about the Philadelphia Housing Authority (PHA)? Note; since the value of the exemption grows with the value of the property, the rationale should also grow with the value of the property.
b) What would be the effect on land use if universities or other tax exempt entities like Philadelphia Housing Authority were required to pay taxes on the property they own?