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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. CAN AN INCREASE IN WAGES ABOVE THE MARKET EQUILIBRIUM EVER BE PROFITABLE? URBAN TRAFFIC CONGESTION POLICIES. OUTLINE Introduction Some Basic Examples

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THINKING LIKE AN ECONOMIST:FERRETING OUT SUBTLE ENDOGENOUS EFFECTS

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  1. THINKING LIKE AN ECONOMIST:FERRETING OUT SUBTLE ENDOGENOUS EFFECTS by Thomas S. Nesslein University of Wisconsin – Green Bay

  2. CAN AN INCREASE IN WAGES ABOVE THE MARKET EQUILIBRIUM EVER BE PROFITABLE? • URBAN TRAFFIC CONGESTION POLICIES

  3. OUTLINE • Introduction • Some Basic Examples 1. The Laffer Curve Tax Revenues = tax rate x tax base

  4. POTENTIAL ADJUSTMENTS TO INCREASES IN TAX RATES: • Decreased Work Effort • Decreased Saving and Investment • Decreased Tax Compliance A. Failure to Report All Income B. Choose Occupations with Wider Scope for Tax Cheating

  5. 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)

  6. 7. RENTAL HOUSING MAINTENANCE UNDER PRICE CONTROL

  7. 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.

  8. 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.

  9. 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.

  10. 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.

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