Public Finance
What’s in it
for the cities?
What is point of Government?
• Set and enforce rules of behavior
• Macroeconomic stabilization
• Deal with monopoly
• Provide Public Goods
• Deal with Externalities
What are Externalities?
• Similar to Pubic Goods– What you do affects me– BUT: You do not take impact on me into account
• Can be negative– What you do hurts me– You don’t compensate me– Examples?
• Can be positive– What you do helps me– I don’t compensate you– Examples?
Impact of Negative Externality
• Brewery & Pizza factory• Private Costs of brewer?
• Supply Curve: Sp
– Optimal Price: Pp
– Optimal Quantity: Qp
• Are these all the costs?• What if beer fumes affect
pizza makers?
P
Sp
D
QQs QP
Pp
Impact of Negative Externality
• Negative Externality– Private and Social Costs– Cost imposed on bystander
• Supply curve actually Ss
– Optimal Price: Ps
– Optimal Quantity: Qs
• Market “fails”– Overproduction
• What can government do?
PSs
Sp
D
QQs QP
Ps
Pp
Impact of Positive Externality
• Spose fumes make pizza makers more productive
• Private v. social benefits• Market fails again!
– Underproduction
• What can government do?
P
S
Ds
Dp
QQP QS
Can a Stadium be a Profit Center for a City?
• Revenues– Rental Payments– Share of Concessions, Parking, Luxury Boxes, etc.– Precise arrangements vary by facility
• Costs– Standard operating costs (labor, utilities, etc)– Depreciation (facility will eventually be worthless)– Opportunity Cost: Could have invested $$– Foregone tax revenue – city can’t pay itself
• Average subsidy to team ~$7 Million/year
One Key: Externalities
• City not like firm– Firm weighs direct costs and benefits
– City looks more broadly
• Teams can have negative externalities – Crime, noise, congestion, …
• Teams can have positive externalities– Do they attract business?
– No evidence that employment or pay rise as result
Public Good Aspects
• Teams as “Civic Totems” – Sense of identity– “And now, YOUR Boston Celtics …”– Especially true for mid-size cities
• Propaganda value– Berlin, 1936– Moscow, 1980– Beijing, 2008
What Do 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 million
Monetary Benefits: Direct Financial Benefits
• Where does $43.6M come from?
• Get local residents to spend more
• Net exports rise– Imports fall
• Residents spend locally instead of elsewhere
– Exports rise• Outsiders spend locally
Are Direct Benefits Overstated?
• Imports also rise – Money in and money out for concessions
• Expenditures on “foreign” inputs – Players who live elsewhere– Team as conduit, not magnet
• Opportunity Cost – Is all $43.6M new spending?– Hollywood & 1994 baseball strike
Conclusion:Direct Benefits are Small
• MLB revenues < Fruit of the Loom– A new course on underwear?– Single team worth less than sizable department store
• Other sports worth even less
• Chicago has 5 major league franchises– 1 of 2 cities with all 4 sports in city proper– Sports account for .08% of personal income
A Third Key: Indirect Benefits
• The Multiplier Effect
• Intuition: Pebble in a Lake– Has ripple effect
• Initial expenditure = pebble– Expenditure => higher income
• Higher income => Spend more: 1st ripple– Subsequent spending raises income & spending
The Arithmetic of the Multiplier
Y=$X+$X*MPC+($X*MPC)*MPC+… Y=$X*(1+MPC+MPC2+MPC3+MPC4+…)
– Numbers in () get smaller – Why?
• Let S=(…)– Infinite sum – how to solve?
• Consider S-MPC*S• Simple multiplier=1/(1-MPC)• Income can rise far more than direct effect
– MPC=0.9 => Multiplier=10
What Determines Size of Multiplier?
• MPC falls as income rises (Why?)– Much of income goes to few highly-paid athletes
– Earning lifetime of athletes highly compressed
• MPC falls if income “leaks” out of local area– More likely for small towns than large– Most athletes/executives live outside of town
How Big is the Multiplier?
• Noll & Zimbalist say = 1/(1-MPC*f)– f = fraction of income spent inside community
• MPC falls from 0.9 to 0.67– N&Z think f= 0.5
• Multiplier falls from 10 to 1.5
• Multiplier in Buffalo seems about right
Teams and Jobs
• D&T studied impact of AZ Diamondbacks– 340 full-time jobs– Cost to city: $240 Million– $706,000 per job
• Other studies smaller - but that much– Cost per job in Baltimore: $127,000 - $331,000
Measures of Benefits: Baade
• Sets pattern for studies of teams & facilities yit-yit-1 = b0 + b1*NTit + b2*NSit+…+ it
– LHS: Growth in per capita income• Actually growth in difference from sample mean
– Function of #teams & #stadiums & controls
• Uses sample of 30 cities 1958-87• Neither coefficient statistically significant• Simulates impact for specific cities
– Significant impact only for Indianapolis– Rosentraub study questions even this
Other Studies
• Coates and Humphreys look smaller– Look within cities– Find difference in immediate neighborhood– Falls off rapidly
• Rappoport looks at property values– Finds higher property values in cities with teams– How to explain when income and jobs not affected?
Special Events:Super Bowls & Olympics
• Different situation: 1-time event
• Still – how much does it add
• Hotels in San Diego– How many would have been occupied anyway?
• Study by Porter of Super Bowl– Looks at spending in counties with Super Bowls– Finds little or no impact
Problems with Stadium Funding
• How to match benefits and costs?– Efficiency– Equity
• Taxes seldom “stay put”• Example:Tax hotel stays
– Try to “export” tax burden– Popular with residents– Does it work?
Jerry Jones v. Mary Kay
• Jones wants new stadium for Cowboys• Dallas County raises hotel tax to 18%
– Why hotel tax?
• Wants to export tax to “foreigners”• Mary Kay objects
– Large Dallas-based cosmetics seller– Threatens to move annual convention
• Similar problem in Philly– Tax on cab rides & hotels bringing less than expected
Why the Fuss?
• Tax Shifts Supply Curve– Say $10 higher
– Does Price rise $10?
• Price rises by less– At higher price: QD<QS
– Pe rises by less than $10
• Hotel revenues fall– Share tax with guests
P
Q
S
S’
$10
D
Pe
Pe’
Burden of Tax
• Before tax• Consumer Surplus
PD
S
Q
Burden of Tax
• Before tax• Consumer Surplus • Producer Surplus• Gain to society=sum
PD
S
Q
Burden of Tax
• Tax Shifts Supply Curve PD
S’
S
Q
Burden of Tax
• What is cost of tax to society?
• Consumer Surplus falls
PD
S’
S
Q
Burden of Tax
• What is cost of tax to society?
• Consumer Surplus falls• Producer Surplus falls
PD
S’
S
Q
Burden of Tax
• What is cost of tax to society?
• Consumer Surplus falls• Producer Surplus falls• Part of loss is transfer
PD
S’
S
Q
Burden of Tax
• What is cost of tax to society?
• Consumer Surplus falls• Producer Surplus falls• Part of loss is transfer• Part of loss disappears
– Deadweight loss
– How to minimize DWL?
PD
S’
S
Q
Lotteries in Baltimore
• Voluntary tax: What could be better?
• Who pays?– Poor and ill-educated– Regressive
• Wasteful tax– 2/3 goes to support bloated bureaucracy
Sales Tax in Milwaukee
• Funded Miller Park with 5-county sales tax
• Sales taxes regressive– Poor spend more of income than rich
• Tax covers more than city– More closely matches benefits
• Sales tax does poor job of matching costs and benefits
Seattle Fine Tunes Tax
• Sales tax on restaurants & bars in King County– Tax businesses that benefit
– A bit too broad, though
• Tax on admissions to stadium– Gets at direct beneficiaries
– Would be even better if taxed luxury boxes more
• Tax on rental cars– Problems outlined above
How about Debt?
• Ricardo Equivalence Theorem– Must pay back debt by raising taxes eventually
• Municipal bonds tax deductible– Pay low interest rate– Export tax to other states
• “Export” burden to later generations– Okay if later generations also benefit– Not if paying for empty stadium
A Public Choice Perspective
• James Buchanan won Nobel for originating• Politicians act “economically”
– Pursue own self-interest– Linked to political fortunes
• Interest groups press own agenda• Highly organized groups have advantage
– Well-defined goals– Access to political power
Logrolling
• Majority may not desire• If gains to some high - and harm to others low• May “trade” votes
– 2 policies & 3 voters• Policy A helps Nina & hurts others
• Policy B helps John & hurts others
– How can each get what s/he wants?
• Both policies pass– Even though majority opposes each
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