PUBLIC FINANCE What s in it for city governments Externalities Ripple Effects Ramsey Rule Vertical and horizontal equity GENERAL GOALS OF GOVERNMENT Rule of law Macroeconomic stabilization Economic efficiency regulate monopolies provide and finance public goods correct externalities Equity EXTERNALITIES What you do affects me But you do not take this into account Can be negative cigarette smoke Can be positive flu vaccination Sport boosters claim positive much greater CITIES SUBSIDIZE THEIR HOME TEAMS Stadium construction and rental Donation of land Roads and parking Average subsidy to team 7 million year PUBLIC GOODS Pubic Goods satisfaction with the MLS Cup non rival consumption Teams as Civic Totems sense of identity and now YOUR Utah Jazz especially true for mid size cities Propaganda value Berlin 1936 Moscow 1980 Beijing 2008 OLYMPIC EXTERNALITY City can weigh social costs and benefits 5 0 Teams can have negative externalities 4 0 crime noise congestion Teams can have positive externalities 2002 Olympics attracted skiers Utah skier days millions 3 0 2 0 Park City housing boom increased employment and good jobs 1 0 Sport boosters usually claim the positive are greater 0 0 Days 2 06 0 06 1980 0 35 7 12 0 R 2 0 88 1980 1985 1990 1995 2000 2005 2010 IMPACT OF NEGATIVE EXTERNALITY Gas consumption and air pollution p Pump price contains only production costs Other costs are social psocial Pollution has health and esthetic costs pmarket Market sells too much gas Can be fixed by a gas tax IMPACT OF POSITIVE EXTERNALITY Flu vaccinations S q WHAT DID SABRES BRING TO BUFFALO 2003 estimates by NY State Comptroller 31M in gate receipts 8 6 M in concessions revenue 4 M in advertising and broadcast revenue Subtotal 43 6 million Multiplies subtotal by conservative 1 5 Total Impact 65 4 million INDIRECT BENEFIT RIPPLE EFFECTS Same logic as the macroeconomic multiplier Like a pebble in a lake Direct effect Donna unemployed gets an accounting job for Sabres 1st ripple Donna buys a condo 2nd ripple her real estate agent celebrates with a steak dinner 3rd ripple his waiter uses tip to rent a movie And so on D external benefits S Other benefits to those unvaccinated psocial Market sells too few vaccinations D qsocial qmarket p Demand includes only private benefits S external costs pmarket D Can be fixed by a vaccine subsidy q qmarket qsocial ONLY NET INCREASES COUNT Get local residents to spend more Net exports rise imports fall residents spend more locally exports rise outsiders attracted and spend too Probably the 43 6M is not all new spending Opportunity cost Substitution Effect Hollywood 1994 baseball strike 2002 Olympics and skier days about 300K below trend Expenditures on players who live elsewhere in off season MULTIPLIER MATH Based on marginal propensity to consume MPC Consider Donna s salary of 50K suppose MPC 0 9 1st ripple 50K MPC 45K 2nd ripple 45K MPC 40 5K 3rd ripple 40 5K MPC 36 5K And many more 10 ripples add up to 325 7K 20 ripples add up to 439 2K Eventually to 500K General formula Multiplier is 10 Total Direct 1 MPC TEN TIMES THE DIRECT IMPACT WOW What if the MPC is lower say MPC 0 5 Donna s salary is 50K suppose MPC 0 5 1st ripple 50K MPC 25K 2nd ripple 25K MPC 12 5K 3rd ripple 12 5K MPC 6 25K And many more REASONS FOR LOWER MPC MPC falls as wages rise much of income goes to high paid athletes they pay high taxes their sports careers are short so they save MPC falls as spending leaks out of local area more likely for small towns than large many athletes live outside of Buffalo 10 ripples add up to 99 9K Eventually to 100K 50 50 Total 100 Multiplier is 2 1 0 5 0 5 CORRECTING THE RIPPLE ESTIMATE Noll and Zimbalist suggest a local formula Total Direct 1 MPC f f is the fraction of income spent locally Suppose f 1 2 and MPC 9 10 Total SAMPLE MIDTERM QUESTION If the marginal propensity to consume MPC is 3 4 and the fraction spent locally is 1 3 the appropriate local multiplier is Direct 20 Direct 1 82 Direct 9 1 11 1 10 2 multiplier The 1 5 multiplier for the Sabres may be okay 1 1 MPC f Real Salt Lake used a multiplier of 1 75 DUELING STUDIES Korean organizers predicted 5 billion gain from the 2002 World Cup Baade and Matheson estimate 6 billion loss remember the winner s curse NFL predicts 150 million benefits from Superbowl Porter estimates 1 million for Tampa only nothing for Miami remember the substitution effect Deloitte and Touche studied impact of Diamondbacks 340 new jobs direct and indirect cost to city 240 million or 706 000 per job Also Coates and Humphreys online DON T FORGET POLITICS Promoting sports subsidies can help reelection Michael White reelected in Cleveland Peter Corroon reelected in SL county lost state governor race Mitt Romney ran for president Elections can be manipulated Paul Allen Bill Gates partner owns Seahawks paid 42 million to have a referendum on a new stadium paid 50 million to campaign won a 300 million stadium Promoters are well organized taxpayers are not quote Ray Keating JERRY JONES VERSUS MARY KAY Jerry Jones wanted new stadium for Cowboys every city has a hotel tax hope that foreigners bear cost Quantity falls to qtax Price rises by less Mary Kay objected from po to ptax large Dallas based cosmetics seller threatens to move annual convention S tax D ptax po pnet S Net of the tax the seller gets less Arlington Dallas suburb to the rescue from po to pnet increases in sales tax hotel tax and car rental tax qtax qo OPPOSITE IN SHORT RUN DEPENDS ON ELASTICITY In the short run supply is fixed Perfectly elastic supply is expected a competitive market in the long run Each hotel is just breaking even before the tax Some hotels close due to losses number of rooms drops to qtax S tax ptax S pnet Quantity unchanged Existing hotels cannot escape in short run Suppliers bear all the cost The tax adds to costs and must be passed on S D The vertical shift due to vertical supply D Dallas hotel market is competitive ptax pnet tax Implies losses and future closings Then consumers bear all the burden qtax qo Mary Kay could benefit in the first year of the tax until bankrupt hotels close and others raise prices to cover tax qo Mary Kay salespeople expect to bear the cost TOTAL SURPLUS BEFORE THE TAX AFTER THE TAX Consumer Surplus is less p blue p Producer surplus pink Tax Shifts Supply Curve seller pays government if buyer pays demand shifts Dallas proposed a hotel tax to 18 Consumer surplus blue ECONOMIC ANALYSIS OF AN EXCISE TAX D Producer Surplus is less