Public Economics Question Assignment 2015

| November 24, 2016

A town population has an annual income that is distributed according to a uniform distribution between $0 and $100k. Let X be the annual income. The most preferred school funding level of an individual is given as a function F=$2000+0.02*X, where F is the funding level.

1. Suppose school funding is controlled by annual referenda over funding increase and decrease. What would you expect the school funding level to be?
2. What would you need to assume about the preferences of the population members beyond the stated assumptions for your answer to be valid?
3. Suppose that this town is not in the us, but instead in a country where a mayor controls local funding. If you have two competing mayoral candidates, what would you expect their campaign promises about school funding to be? State assumptions that are needed for the result.

An imaginary Missouri town is thinking about giving tax subsides for a casino project. It is estimated that a casino visitor brings $100/per visit of revenue for the casino and that the marginal cost of attracting visitors is given by .1*X, where X is the number of visit.

1. What is the optimal number of Casino visits from the Casino’s perspective?
2. If each casino visitor also spent an extra $100/visit on other local businesses, can you say what is the optimal subsidy for the casino and what is the socially optimal level of casino visits? Justify you answer, either with a calculation or by stating the reason why you cannot say what is the optimal number of visits/subsidy?
3. A consultant for the Casino project points out that the value of the commercial real estate around the casino will increase in value because it attracts customers. Is this a further justification for the subsides beyond what is considered in part b?

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