Transcript Thinking Like an Economist: Ferreting Out Subtle Endogenous Effects

THINKING LIKE AN
ECONOMIST:FERRETING OUT
SUBTLE ENDOGENOUS EFFECTS
by
Thomas S. Nesslein
University of Wisconsin – Green Bay
5. CAN AN INCREASE IN WAGES ABOVE THE
MARKET EQUILIBRIUM EVER BE PROFITABLE?
6. URBAN TRAFFIC CONGESTION POLICIES
OUTLINE
I. Introduction
II. Some Basic Examples
1. The Laffer Curve
Tax Revenues = tax rate x tax base
POTENTIAL ADJUSTMENTS TO INCREASES IN TAX
RATES:
1. Decreased Work Effort
2. Decreased Saving and Investment
3. Decreased Tax Compliance
A. Failure to Report All Income
B. Choose Occupations with Wider Scope
for Tax Cheating
4. Increase in Legal Tax Avoidance
A. Increased Demand for Nontaxable
Fringe Benefits
B. Increased Use of Tax Expenditures
C. Increase Choice of Nontaxable Investments
(e.g. municipal bonds, IRA’s)
7. RENTAL HOUSING MAINTENANCE UNDER
PRICE CONTROL
CONVENTIONAL VIEW:
Rent Control decreases the profitability of
housing maintenance. Landlords respond by
decreasing maintenance investments.
Consequently, the housing stock will be less
well maintained under rent control.
Edgar Olsen:
Rent control decreases landlord maintenance
but rent control transfers income to tenants.
After rent controls, tenants have more income
but a less well maintained dwelling.
Consequently, tenants have incentive to
substitute their maintenance for the landlord’s
maintenance.
Critique of Olsen’s Efficient Tenant Maintenance Regimes
General Argument:
Under free-market contracting strong incentives exist for tenants and landlords to
enter into rental agreements that assign maintenance responsibilities in the most
efficient configuration.
But one does not observe real world rental contracts that assign major
maintenance responsibilities to tenants.
Consequently, there seems a strong intuitive basis for suggesting that the major
reassignment of maintenance responsibilities implied by the tenant-maintenance
thesis glosses over important real world complications.
Real World Complications
1. The property rights assigned under rent
control are not identical to free-market
property rights.
2. Major problems of collective decision
making.