Public Finance

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Public Finance

• Whats in it
• for the cities?

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What is point of Government?

• Set and enforce rules of behavior
• Macroeconomic stabilization
• Deal with monopoly
• Provide Public Goods
• Deal with Externalities

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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 dont compensate me
• Examples?
• Can be positive
• What you do helps me
• I dont compensate you
• Examples?

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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?

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Sp
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QP
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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?

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Sp
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Impact of Positive Externality

• Spose fumes make pizza makers more productive
• Private v. social benefits
• Market fails again!
• Underproduction
• What can government do?

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Ds
Dp
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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 cant pay itself
• Average subsidy to team 7 Million/year

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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

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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

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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

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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

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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

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ConclusionDirect Benefits are Small

• MLB revenues
• 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

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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

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The Arithmetic of the Multiplier

• DYXXMPC(XMPC)MPC
• DYX(1MPCMPC2MPC3MPC4)
• Numbers in () get smaller Why?
• Let S()
• Infinite sum how to solve?
• Consider S-MPCS
• Simple multiplier1/(1-MPC)
• Income can rise far more than direct effect
• MPC0.9 Multiplier10

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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

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How Big is the Multiplier?

• Noll Zimbalist say 1/(1-MPCf)
• f fraction of income spent inside community
• MPC falls from 0.9 to 0.67
• NZ think f 0.5
• Multiplier falls from 10 to 1.5
• Multiplier in Buffalo seems about right

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Teams and Jobs

• DT 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

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Measures of Benefits Baade

• Sets pattern for studies of teams facilities
• Dyit-Dyit-1 b0 b1NTit b2NSit eit
• 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

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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?

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Special EventsSuper 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

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Problems with Stadium Funding

• How to match benefits and costs?
• Efficiency
• Equity
• Taxes seldom stay put
• ExampleTax hotel stays
• Try to export tax burden
• Popular with residents
• Does it work?

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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

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Why the Fuss?

• Tax Shifts Supply Curve
• Say 10 higher
• Does Price rise 10?
• Price rises by less
• At higher price QD
• Pe rises by less than 10
• Hotel revenues fall
• Share tax with guests

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10
Pe
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Q
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Burden of Tax

• Before tax
• Consumer Surplus

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D
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Burden of Tax

• Before tax
• Consumer Surplus
• Producer Surplus
• Gain to societysum

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Burden of Tax

• Tax Shifts Supply Curve

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Burden of Tax

• What is cost of tax to society?
• Consumer Surplus falls

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Burden of Tax

• What is cost of tax to society?
• Consumer Surplus falls
• Producer Surplus falls

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Burden of Tax

• What is cost of tax to society?
• Consumer Surplus falls
• Producer Surplus falls
• Part of loss is transfer

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D
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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?

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D
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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

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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

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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

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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

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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

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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