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Transcript of Business Educators Conference BLACKLOW
Business Educators Australasia 2016 Biennial Conference
© University of Tasmania - CRICOS Provider Code 00586B
Using Public Policy to Teach Economics -
Economics, Teenagers and Policy
Dr Paul BlacklowTasmanian School Of Business & Economics
1
ECONOMICS, TEENAGERS AND POLICY
Teenagers, Revealed Preferences
and Optimal Choices
Elasticity, Smoking
and Tobacco Excise
Australian Education System Simplified
and Education Vouchers
© University of Tasmania - CRICOS Provider Code 00586B 2
Teenagers, Revealed Preferences
and Optimal Choices
© University of Tasmania - CRICOS Provider Code 00586B 3
Teenagers• I’m no expert on teenagers (yet)
– but need to be, my eldest has just turned 13)
• Most people want their choices and actions to be respected.
– A little less so as we age.
• Teenagers especially want their choices and actions to be respected as recognition they are no longer children and becoming adults.
© University of Tasmania - CRICOS Provider Code 00586B 4
Revealed Preferences I• Preferences of individuals indicate which goods and
choices they prefer and indicate how enjoyment, life satisfaction or utility they receive from them.
• Preferences of individuals can be revealed by their purchasing habits and other choices.
– Samuelson (1938)
© University of Tasmania - CRICOS Provider Code 00586B 5
Utility Maximisation• Economists model individuals’ purchasing habits and
choices as the..
* maximisation of utility
* given time, money and other constraints.
• An individual’s utility is a function of their own unique tastes and preferences.
• We are unlikely to know another person’s complete set of preferences and tastes, but…
© University of Tasmania - CRICOS Provider Code 00586B 6
Revealed Preferences II• Each time an individual makes a choice or purchasing
decision they reveal a little of their preferences, given their constraints.
• If I am observed purchasing flat-white coffee and toasted vegetarian regularly for lunch.
• I must have preference for those goods for lunch given my time and income constraints.
© University of Tasmania - CRICOS Provider Code 00586B 7
Optimal Choices I• The observed purchases and choices an individual
makes can be considered the result of them
* maximising their own utility
* given their constraints.
• If individuals are rational and free to make their own decisions then will choose what is best for them.
• Their purchases and choices are optimal for them given their preferences and constraints!
© University of Tasmania - CRICOS Provider Code 00586B 8
Optimal Choice Eg.1• If Sam chooses to spend all Saturday morning
sleeping in.
• It is his optimal choice, given his
* preferences (maybe enjoys/needs sleep)
* constraints (little money, more time)
© University of Tasmania - CRICOS Provider Code 00586B 9
Optimal Choices Eg.1• You might try dragging Sam out of bed!
• You may have some knowledge of his constraints
• But unlikely to know his full preferences or the extent to which certain choices bring utility.
– He might enjoy sleeping a tremendous amount ???
– He may gain very little utility from other activities???
© University of Tasmania - CRICOS Provider Code 00586B 10
Optimal Choices Eg.2• If Lily chooses to spend Saturday mornings at
Salamanca market.
• It is her optimal choice, given her
* preferences (maybe enjoys markets, fresh air)
* constraints (little time, more money)
© University of Tasmania - CRICOS Provider Code 00586B 11
Optimal Choices Eg.2• You might try persuading Lily to do something
different.
• But unlikely to know her full preferences or the extent to which certain choices bring utility.
– She may gain very little utility from sleeping in or other activities ???
– She may have strong preference for outdoor and/or cultural and/or shopping activities ???
– She may have a information constraint of not knowing what else to do???
© University of Tasmania - CRICOS Provider Code 00586B 12
Optimal Choices - Summary• If rational and not suffering from too many
information constraints…
• Everyone’s (including teenagers)
• Choices are optimal.
• Whenever I question my youngest 7yo daughter’s distaste for tomatoes.
• “Daaaad, everyone has different tastes”
• “They might be best for you, but they are not best for me”
© University of Tasmania - CRICOS Provider Code 00586B 13
Price Elasticity• Price Elasticity measures how responsive market is to
a change in price.
• Price Elasticity of Demand
where P is price, Q is quantity
• The own price elasticity is negative for all (non-giffen) goods and so the negative sign is often ignored by using the absolute value
%
% P
Q
© University of Tasmania - CRICOS Provider Code 00586B 15
Price Elasticity
• How do we use it? Re-arranging the above gives
• Thus if the price elasticity of demand is –1.37 a 10% rise in the price of the good is likely to cause a fall in sales of 13.7%.
% % PQ
© University of Tasmania - CRICOS Provider Code 00586B 16
© University of Tasmania - CRICOS Provider Code
00586B17
Price Elasticity
• If > 1 then demand is elastic (responsive to price) and %Q > %P
• If < 1 then demand is inelastic (unresponsive to price) and %Q < %P
• If = 1 then demand is unit elastic and %Q = %P
Australian Tobacco Use 2011-12
• 3 million (15% of the 20 million Australian adults) regularly smoke tobacco)– ABS 4364.0.55.003 - Australian Health Survey: Updated Results, 2011-2012.
• Spent approximately $13.5 billion on tobacco.– ABS 5206.0 Australian National Accounts: national income, expenditure and
product, Table 8.
• 1.7% of total Household spending and 0.94% of GDP. – ABS 5206.0 Australian National Accounts: national income, expenditure and
product, Table 1 and Table 8.
© University of Tasmania - CRICOS Provider Code 00586B 18
Australian Tobacco Tax 2011-12
• The federal and state governments raised approximately
– $7.50 billion from tobacco excise taxes
– $1.23 billion on the GST from tobacco.– ABS 5506.0 - Taxation Revenue, Australia
• The total excise tax rate on tobacco is %157 and then the GST is applied at 10%– http://www.tobaccoinaustralia.org.au
© University of Tasmania - CRICOS Provider Code 00586B 19
Tobacco Elasticity
• The elasticity of the total tobacco expenditure(including all taxes) with respect to the after tax price is
xp = ∆%x/∆%p = -0.25
• The elasticity of the number of smokers with respect to the price is
np = ∆%n/∆%p = -0.25
© University of Tasmania - CRICOS Provider Code 00586B 20
The Tax on Tobacco
• Total tobacco excise tax is %157 and the GST of 10% is applied on top of that
• The final after tax price p given the producer price pP is
p = pP x (1+t) x (1+gst)
= pP x 2.57 x 1.1
= 2.827 pP
© University of Tasmania - CRICOS Provider Code 00586B 21
The Tax on Tobacco
• By setting pP=1 our quantity is measured in pre-tax dollars of tobacco.
• Since x = p q then q = x / p
• With x0 = $13.5b and p0=2.827
q0 = $4.775b pre-tax $ of tobacco
© University of Tasmania - CRICOS Provider Code 00586B 22
Tobacco Excise 200%
Consider the effect of raising the excise rate from 157% to 200%.
• The final after tax price p is
p = 1 x (1+t) x (1+gst)
= 1 x 3.00 x 1.1
= 3.30
© University of Tasmania - CRICOS Provider Code 00586B 23
Tobacco Excise 200%
How much does the price increase?
• Given p0 = 2.827 p1 = 3.300
%Δp = (p1-p0 )/p0
= (3.300 – 2.827) / 2.827
= 0.473 / 2.827
= 0.167315
= 16.73%
© University of Tasmania - CRICOS Provider Code 00586B 24
Tobacco Excise 200%
How many smokers would give up?
• Given np = ∆%n/∆%p = -0.25
%Δp = 16.73%
∆%n = np x ∆%p
= - 0.25 x 16.73%
= - 4.2%
• 0.125m smokers (4.2% of 3m smokers)
© University of Tasmania - CRICOS Provider Code 00586B 25
Tobacco Excise 200%
How much would the remaining smokers spend?
• Given xp = ∆%x/∆%p = -0.25
%Δp = 16.73%
∆%x = np x ∆%p
= - 0.25 x 16.73%
= - 4.2%
• Total expenditure will decrease by 4.2%
© University of Tasmania - CRICOS Provider Code 00586B 26
Tobacco Excise 200%
How much would the remaining smokers spend?
• A 4.1829% decrease in the total tobacco expenditure of $13.5b is -$0.565b.
• So the remaining smokers would spend $12.935b in total.
© University of Tasmania - CRICOS Provider Code 00586B 27
Tobacco Excise 200%
How much pre-tax tobacco would they buy?
• Since the price-including tax is p1 = 3.30 and the total expenditure is x1 $12.935b
q1 = x1 / p1
=$12.935b / 3.30
= $3.920b of pre-tax tobacco.
© University of Tasmania - CRICOS Provider Code 00586B 28
Tobacco Excise 200%
How much GST and excise tax per year would be raised from tobacco by the government?
$3.920b x 200%
= $7.840b in excise tax.
$3.920b x 300% x 0.10
= $1.176b in GST
© University of Tasmania - CRICOS Provider Code 00586B 29
Tobacco Excise 200%
By how much does the policy change government revenue per year?
Δ Excise Tax
= $7.840 b - $7.500 b = $0.340 b
Δ GST
= $1.176 b - $1.230 b = -$0.054 b
• Over all the government revenue increases by $0.285 Billion per year.
© University of Tasmania - CRICOS Provider Code 00586B 30
External Smoking Costs
© University of Tasmania - CRICOS Provider Code 00586B 31
External Costs2004-05
($m)2011-12
($m)
2011-12($ per
smoker)
Health (net) $318 $389 $130
Production in the workplace $5,749 $7,028 $2,343
Production in the home $9,843 $12,032 $4,011
Fires $63 $77 $26
Resources used in abusive consumption $3,636 $4,444 $1,481
Less consumption resources saved $7,583 $9,269 $3,090
Total Tangible Costs $12,026 $14,700 $4,900
Intangible Costs(Loss of Life) $19,460 $23,787 $7,929
Total Cost $31,486 $38,487 $12,829
Collins D., and Lapsley H., (2008) The Cost of Tobacco, Alcohol and Illicit Drug Abuse to Australian Society in 2004/05, Commonwealth of Australia, Department of Health and Ageing
Tobacco Excise 200%
0.125m Smokers that give up?
• Initially personally worse off as they adjust.
• Reduce costs to society by
– $12,829 x 0.125 m = $1,603m
© University of Tasmania - CRICOS Provider Code 00586B 32
Tobacco Excise 200%
2.875m Smokers that remain?
• Personally worse off!
• Paying 16% more for the same product.
• Cut their smoking spending by 4% so could estimate a 4% cut in costs to society by
– $12,829 x 4.875 m x 4% = $1,475m
© University of Tasmania - CRICOS Provider Code 00586B 33
Tobacco Excise 200%
17 Million Non-Smokers ?
• No personal effect
• But Government budget balance improves by $0.285 billion.
• And external social costs have been reduced by $3b.
© University of Tasmania - CRICOS Provider Code 00586B 34
Australian Education System Simplified and Education Vouchers
© University of Tasmania - CRICOS Provider Code 00586B 35
Australian Education System Simplified
• There are approximately 2 million public school students in Australia and 1 million private school students.
• The Federal and State governments combined spend approximately $48 billion on public education and $12 billion on private education per year.
• Private schools raise an additional $12 billion from fees per year.
• Assume that public and private schools are equally efficient, so that $1 of funding to either system has the same effect.
© University of Tasmania - CRICOS Provider Code 00586B 36
Minister for
Education –
Senator Simon
Birmingham
Australian Education System Simplified
1 million private students
• $12b from government + $12b from fees
• The average funding per student is $24,000 per student.
• Price is effectively $0.50 per $ of education
2 million private students
• $24b from government
• The average funding per student is $24,000 per student.
• Price is effectively $0.00 for $24,000 of education
© University of Tasmania - CRICOS Provider Code 00586B 37
Australian Education System Simplified
If parents are willing to pay less than $12,000 on their child’s education. Suppose they are WTP = $8,000.
Private: $8,000 from parents at $0.50 per $ of education
$16,000 worth of educationvs
Public: $0 from parents + $24,000 from government
$24,000 worth of education
Public Education is a clear choice
it has more education and more money for parents.
© University of Tasmania - CRICOS Provider Code 00586B 38
Australian Education System Simplified
If parents are willing to pay more than $12,000 on their child’s education. Suppose WTP = $16,000.
The choice between -$16000 and $32,000 education vs
$0 and $24,000 education
Would normally be determined by preferences and we could not know someone’s choice.
Except that we have assumed they are willing to pay $8000 and
So will choose private education.
© University of Tasmania - CRICOS Provider Code 00586B 39
Australian Education System Simplified
1 million private students
• Have parents with WTP greater than $12,000
2 million public students
• Have parents with WTP less than $12,000
• WTP incorporates income and other constraints as well as preferences for education.
© University of Tasmania - CRICOS Provider Code 00586B 40
A (Revenue Neutral) Education Voucher
• If the all government education funding of $60b was shared out equally to all 3 million students as a education voucher it would be worth $60,000 million/ 3 million =
$20,000 per student.
• There would be no public schools.
• There would be no government funding to private schools (other than the voucher) so that price of education becomes $1.00 for a $ of education.
© University of Tasmania - CRICOS Provider Code 00586B 41
A (Revenue Neutral) Education Voucher
Does the voucher system make parents better off?
• Yes for some no for others!
• Can you identify which types of parents would be better off and worse off?
Will it result in better student outcomes?
• Yes for some no for others!
• Can you identify which students would have better outcomes or worse outcomes?
© University of Tasmania - CRICOS Provider Code 00586B 42
A (Revenue Neutral) Education Voucher
Consider who parents were WTP less than $12,000 on their child’s education.
Existing System
Spend $0 and get $24,000 worth of public education.
© University of Tasmania - CRICOS Provider Code 00586B 43
A (Revenue Neutral) Education Voucher
Consider who parents were WTP less than $12,000 on their child’s education.
Suppose their WTP was $4,000
If they spend the same as before $0 + $20,000 voucher now they will get $20,000 worth of education ($4,000 less education).or
If they spend $4,000 + $20,000 voucher they will get the same amount of education as before $24,000 ($4,000 less money)
Worse off
© University of Tasmania - CRICOS Provider Code 00586B 44
A (Revenue Neutral) Education Voucher
Consider who parents were WTP less than $12,000 on their child’s education.
If their WTP does not change at all they will still wish willing to pay $4000 + $20000 voucher and so a student would receive the same education $24,000 worth for WTP = $4000.
If WTP = $2000 then students get $22,000 education
If WTP = $6000 then students get $26,000 education
If WTP = $12000 then students get $32,000 education
if WTP < 4000 less education
if WTP > 4000 more education
© University of Tasmania - CRICOS Provider Code 00586B 45
A (Revenue Neutral) Education Voucher
Consider who parents were WTP more than $12,000 but less than $20,000 on their child’s education.
For example suppose their WTP was $16,000.
Existing System
Spend $16,000 to get $32,000 worth of private education.
© University of Tasmania - CRICOS Provider Code 00586B 46
A (Revenue Neutral) Education Voucher
Consider who parents were WTP more than $12,000 but less than $20,000 on their child’s education.
If they spend the same as before $16,000 and their voucher now they will get $36,000 worth of education ($4,000 more education).
or
If they spend $12,000 + $20,000 voucher they will get the same amount of education as before $32,000 ($4,000 more money)
Better off (and more education, if no change in WTP)
© University of Tasmania - CRICOS Provider Code 00586B 47
A (Revenue Neutral) Education Voucher
Consider parents who were WTP more than $20,000 on their child’s education.
Suppose their WTP was $30,000.
Existing System
Spend $30,000 and get $60,000 worth of private education.
© University of Tasmania - CRICOS Provider Code 00586B 48
A (Revenue Neutral) Education Voucher
Consider parents who were WTP more than $10,000 on their child’s education.
Voucher System
If they spend the same $30,000 + $20,000 voucher they will get $50,000 worth of education ($10,000 less education).
If they spend $40,000 + $20,000 voucher they will get $60,000 worth of education (but have $10,000 less money)
Worse off (and less education, if no change in WTP)
© University of Tasmania - CRICOS Provider Code 00586B 49
A (Revenue Neutral) Education VoucherExtensions
• Could discuss and examine changes to WTP.
• Reaction to vouchers.
• Probably should split private into independent and other (mainly Catholic) schools.
© University of Tasmania - CRICOS Provider Code 00586B 50