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Elasticity of Housing Supply and Substitution: Empirical Estimations and Comparisons with Previous Research

This study discusses the elasticity of housing supply and the elasticity of substitution between owning and renting. It presents empirical estimations of the benefits and compares assumptions and results with previous research by Michelle J. White and Lawrence J. White published in the Journal of Public Economics in 1977. The study also examines the conventional wisdom and explores the impact of the US federal income tax subsidy on owner-occupiers and renters. The analysis includes graphical and mathematical explanations and highlights the need to consider substitution effects when measuring deadweight loss. The authors argue for more equitable treatment of renters in tax policies.

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Elasticity of Housing Supply and Substitution: Empirical Estimations and Comparisons with Previous Research

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  1. and who doesn‘t! • Discusses elasticity of housing supply & elasticity of substitution of housing supply between owning and renting • Answers titel graphically • Answers titel mathematically • Gives empirical estimations of the benefits • Compares assumptions and results with previous research by Michelle J. White & Lawrence J. White published in the Journal of Public Economics, Vol.3, 1977 • Discusses elasticity of housing supply & elasticity of substitution of housing supply between owning and renting • Answers titel graphically • Answers titel mathematically • Gives empirical estimations of the benefits • Compares assumptions and results with previous research „violates the conventional wisdom!“ 12-11-02 Bjørn Baltzer

  2. The Subsidy • Owner-occupiers are subsidized by the US federal income tax: • mortage interests and locally paid property taxes can be deducted from taxable income • Renters are not subsidized: • you cannot deduct rent from taxable income BUT:formal incidence vs. effective incidence

  3. That‘s where we will end …

  4. Perfectly elastic? P • Perfectly inelastic? • Somewhere in between! S S S 0 DR DO DT Q The Demand for Housing The Demand for Housing & the Supply for Housing

  5. P QR QO QT QR, QO, QT, S P, P PO, 0 DR DO DT Q DO, DT, The Subsidy Comes into Play Let‘s not forget …

  6. P S P , P PO, 0 QR DR QO DO QT DT Q QR, QO, DO, QT, DT, The Traditional Deadweight Loss

  7. P S P , P PO, 0 QR DR QO DO QT DT Q QR, QO, DO, QT, DT, Loss to renters LR 1 LR 2

  8. P S P , P PO, 0 QR DR QO DO QT DT Q QR, QO, DO, QT, DT, Gains to Owner-Occupiers GO 1 GO 2 GO 3

  9. P S P , P PO, 0 QR DR QO DO QT DT Q QR, QO, DO, QT, DT, More Gains: Gain to producers GP Gains to landlordsGL1 = LR 1 GL2

  10. Total annual cost of the subsidy program P S P , P PO, 0 QR DR QO DO QT DT Q QR, QO, DO, QT, DT,

  11. The Generalized Deadweight Loss … compared to the traditional deadweight loss

  12. Conclusions The Traditional Deadweight Loss underestimates the (true) Generalized Deadweight Loss Reason: a large part of the deadweight loss is generated by the transfer of ressources among different demander groups Consequence: whenever a tax or subsidy program applies differentially to participants in a market (here owner-occupiers vs. renters), then one has to take substitution into account when measuring the societal deadweight loss Authors‘ claim: renters are disadvantaged against owner-occupiers, they should be treated more equally taxwise

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