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Monopoly and Antitrust. Inefficiency of Monopoly Competitive Outcome P = P C = MC Q = Q C Monopoly Outcome P M > P C = MC Q = Q M < Q C MR D MC QMQM PMPM.

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Presentation on theme: "Monopoly and Antitrust. Inefficiency of Monopoly Competitive Outcome P = P C = MC Q = Q C Monopoly Outcome P M > P C = MC Q = Q M < Q C MR D MC QMQM PMPM."— Presentation transcript:

1 Monopoly and Antitrust

2 Inefficiency of Monopoly Competitive Outcome P = P C = MC Q = Q C Monopoly Outcome P M > P C = MC Q = Q M < Q C MR D MC QMQM PMPM QCQC CompMonop CS PS Welfare DWL A B C A B C A+B A+B+C -- A+B+C -- Rent-seeking may add to DWL quantity $ PCPC

3 Price Discrimination Pricing strategy that attempts to capture more consumer surplus Types 1 st Degree: 2 nd Degree: 3 rd Degree: Necessary Conditions Market power Segment the market Prevent resale Charge each consumer the highest price theyre WTP Quantity discounts Charge prices based on price elasticities

4 First Degree Price Discrimination Monopolist is able to capture CS …and eliminate DWL by selling until P = MC MR D MC QMQM PMPM QCQC CS PS DWL

5 Second Degree Price Discrimination Offering discounts based on the number of games attended Offering discounts based on the number of people in your group MR D MC QMQM PMPM QCQC

6 Third Degree Price Discrimination Segment market into groups with differing elasticities Adults Senior citizens Profit max rule: MR A = MR S = MC MR A = P A [1 – 1/E A ] Example: E A = 3 E S = 5 MC = 8 Charge higher price to group with less elastic demand P A = $12 P S = $10

7 Personal Seat Licenses People pay for the right to buy season tickets Two-part tariff: entrance fee + per unit charge Per unit price = MC Entrance fee = resulting CS MR D MC QMQM PMPM QCQC

8 Monopsony Monopoly on the buyer side Labor Market and the Reserve Clause BBC and English Soccer

9 Whats Right With Monopoly? Relevant Market? Broader the definition, the lower the market power Natural Monopoly? High fixed costs; low MC Economies of scale ATC = TC/Q = [FC + VC]/Q AFC + MC Public Good? MC ATC Quantity $

10 Barriers to Entry Broadcast contracts NFL spreads contracts out over CBS, Fox, NBC, ESPN USFL Pre-emptive franchise location AFL vs NFL in Dallas and Minneapolis

11 Antitrust Law Sherman Act (1890) Section 1: prohibits cartels (or trusts) Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal. Section 2: attacks monopoly itself Every person who shall monopolize or attempt to monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor…

12 Federal Baseball v NL (1922) Federal Leagues 1914-1915 challenge to the AL-NL Judge Kennesaw Mountain Landis Delayed ruling for a year All Federal League teams were bought out except one Baltimore Terrapins filed suit against NL because of reserve clause Supreme Court (1922) Ruled baseball was not interstate commerce Result: Baseball is exempt from antitrust laws Toolson (1953) Flood (1972)

13 Federal Baseball v NL (1922) Federal League (1914-1915) Brooklyn Chicago Pittsburgh St. Louis Baltimore Buffalo Indianapolis Kansas City National League (1876 – present) Boston Brooklyn Chicago Cincinnati New York Philadelphia Pittsburgh St. Louis American League (1901 – present) Boston Chicago Cleveland Detroit New York Philadelphia St. Louis Washington US Supreme Court ruled: baseball was not interstate commerce Implication: Baseball is exempt from antitrust laws Toolson (1953) Flood (1972)

14 Contrast with NFL Radovich v NFL (1957) Blacklisted for playing in AAFC NFL lost at Supreme Court no legal monopoly power or monopsony power Tried to retain monopsony Gentlemans Agreement until early 1960s Rozelle Rule imposed when that broke down Successful antitrust suit in 1970s by John Mackey Players Association negotiated deal that allowed Rule to continue Tried to establish monopoly Got limited exemptions for TV and merger with AFL No games on Friday (HS) and Saturday (NCAA)

15 MLB has had few challengers Federal League was last major rival Other leagues have had regular challenges Baseball has been stable Montreal Expos moved to Washington – 2005 Washington Senators to Texas – 1972 Blocked attempts by Giants, White Sox, Pirates Impact of Baseballs Exemption

16 NFL Has Been Far Less Stable 1980: Oakland Raiders sue NFL Challenged NFLs right to block move to LA Brought antitrust suit Jury – drawn from LA! – agrees NFL cannot force other teams to stay put Moves from Baltimore, Cleveland, LA (2X), Houston, St. Louis Did dissuade New England from moving to Hartford, CT Seattle from moving to LA

17 Cartel Theory Game Theory Prisoners Dilemma NY Yankees High PriceLow Price NY Mets High Price $500k $700k $200k Low Price $200k $700k $300k Dominant Strategy? Each team would set Low Price Competitive Outcome: (Low, Low) Cooperative Outcome: (High, High) Unstable due to incentive to cheat Nash Equilibrium

18 18 football-related deaths in 1905 President Roosevelt threatened to take action NCAA formed to control on the field behavior The Sanity Code (1946) Drew up rules for off the field behavior Limits to financial aid to athletes Seven Sinners refuse NCAA fails to get 2/3 majority needed to expel NCAA in tatters – cannot enforce own rules NCAA: An Incidental Cartel

19 New Life for the NCAA Point shaving scandal breaks out in 1952 CCNY ruined as national power Kentucky implicated UK Coach – Adolph Rupp – likely involved as well Also found illegal payments to players by Rupp NCAA failed to respond Embarrassed SEC suspends UK NCAA establishes Death Penalty Boycott by other members UK is suspended for one season SMU football 1987-88 SW LA basketball 1973-75 Morehouse soccer 2003 MacMurray tennis 2004-07

20 Applying the NCAAs Cartel Power Monopsony Power Drive down price of labor Problem: Schools cheat Monopoly Power Early TV contract Limited teams to 3 TV games every 2 years CFA lobbied for more TV NCAA created I-A and I-AA; reworked revenue sharing CFA filed Antitrust lawsuit against NCAA (1984) Now many broadcasts – but less revenue!

21 Competitive Balance The Value of Uncertainty of Outcome

22 Turnover in Champions? 1949 Yankees beat Dodgers 1950 Yankees beat Phils 1951 Yankees beat Giants 1952 Yankees beat Dodgers 1953 Yankees beat Dodgers 1954 Giants beat Indians 1955 Dodgers beat Yankees 1956 Yankees beat Dodgers 1957 Braves beat Yankees 1958 Yankees beat Braves 1959 Dodgers* beat White Sox 1960 Pirates beat Yankees 1961 Yankees beat Reds 1962 Yankees beat Giants 1963 Dodgers* beat Yankees 1964 Cardinals beat Yankees

23 In 1960s only 2 NBA champions Celtics Champions 1959-66, 1968-69 Since 1980 only 9 NBA champions Lakers: 1980; 1982; 1985; 1987-1988; 2000-2002; 2009-2010 Bulls: 1990-1993; 1996-1998 Spurs: 1999; 2003; 2005; 2007 Celtics: 1981; 1984; 1986; 2008 Pistons: 1988-1989; 2004 Rockets: 1994-1995 Heat: 2006 Mavs: 2011 Sixers: 1983 Is Baseball Unique? Champs since 1980 MLB: 20 NFL: 15 NHL: 15 NBA: 9

24 Leagues Want Competitive Balance Stimulates interest Attendance TV Ratings Team dynasties? Are Yankees bad for baseball? law of diminishing returns Market size effects What is competitive balance? Even competition in each game? Turnover among champions? MR S MR L WSWS WLWL Winning percentage $ MC

25 Measuring Competitive Balance Between Season Variation Hirfindahl-Hirschman Index (HHI) HHI quantifies turnover in champions Also used to measure monopoly power Where: c i =#championships by team i; T=#Years; N=#Teams Large HHI means few teams dominate

26 What is the HHI for the NBA since 1987? Championships Chi: 6 LA: 7 Det: 3 SA: 4 Hou: 2 Miami: 1 Boston: 1 Dallas: 1 N =25 years HHI = HHI = 0.187

27 Baseball and the HHI 1950s AL Champions Yankees (8); Indians; White Sox HHI=.660 NL Champions Dodgers (5); Giants (2); Braves (2); Phillies HHI=.340 2000s AL Champions Yankees (4); Red Sox (2); Angels; Tigers; White Sox; Rays HHI=.240 NL Champions Cardinal (2); Phillies (2); Marlins; Diamondbacks; Giants; Astros; Rockies; Mets HHI=.140

28 Competitive Balance Within Season Variation evenness of competition standard deviation average distance that observation lies from mean Actual: σ W = Ideal: σ I = Ratio: R = σ W / σ I R > 1 indicates imbalance T = number of teams G = number of games

29 Dispersion of Winning Percentage for 2011 or 2010-11 Season Standard Deviation LeagueActualIdealRatio NBA.158.0562.82 EPL.108.0811.33 MLB.069.0391.77 NFL.201.1251.61 NHL.080.0561.43

30 Example: 60-40 Gate split NY: R G = $36m and C = $28.8 π NY = $7.2m KC: R G = $18m and C = $16 π KC = $2.0m π NY = 0.6(36) + 0.4(18) – 28.8 = $0 π KC = 0.6(18) + 0.4(36) – 16 = $9.2m Attempts to Promote Competitive Balance Revenue Sharing Indirect method of redistributing players Two conditions: Teams must benefit financially from improving performance Players must be able to move among teams

31 Salary Caps Luxury Taxes Attempts to Promote Competitive Balance Yankees: (212.75-178)(.40) = $13.9m Soft caps: Larry Bird exemption Injuries/Bonuses CapFloorNotes NFL (2011-12)$120m$108m Cap = % DGR NBA (2011-12)$58.04m$49.3m Player max 25%, 30%, 35% of cap NHL (2011-12)$64.3m$48.3m Player max $12.86m Notes MLB (2011)Flat rate on amount over threshold 50% player benefits 50% IGF + dev. countries NBA (2011-12)Progressive tax on amount above threshold $1.5 ($5m or less) $3.25 ($15-25m over) 50% goes to non-violators


33 Change is needed and that is reflected by the fact that over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseballs highest operating profits, the Globe quoted Henry as saying. Who, except these teams, can think this is a good idea? John Henry Owner, Boston Red Sox December 2009

34 Reverse Order Drafts Schedule Adjustments Promotion and relegation Attempts to Promote Competitive Balance Incentive to lose late in season?

35 Impact of Strategies What is correlation between payroll and winning? Payroll Winning Percent ? Correlation coefficient = +1.0 ?


37 Impact of Strategies Correlation between payroll and winning: 2010-11 Coase Theorem Initial allocation of player rights does not affect distribution of talent SportCorrelation Coefficient NFL.317 MLB.410 NBA.571 NHL.734 Simon Rottenbergs Invariance Proposition

38 Baseballs Reserve Clause Reserve Clause: players are the property of the team that drafted them Free Agency: players can negotiate with any team Texas New York Revenue = $20mRevenue = $40m Salary = $1mSalary = $1.1m Reserve Clause Revenue = $20mRevenue = $40m Salary = $21m Free Agency

39 Impact of Strategies Low correlation between payroll and winning Coase Theorem Initial allocation of player rights does not affect distribution of talent Reserve clause is no different than free agency Reverse order draft should have no long-term effect

40 Public Finance The Market for Sports Franchises

41 1952 National League: Team Standings TeamWinsLossesWPGB Brooklyn Dodgers9657.6270 New York Giants9262.5974½ St. Louis Cardinals8866.5718½ Philadelphia Phillies8767.5659½ Chicago Cubs77.50019½ Cincinnati Reds6985.44827½ Boston Braves6489.41832 Pittsburgh Pirates42112.27354½ 1952 American League: Team Standings TeamWinsLossesWPGB New York Yankees9559.6170 Cleveland Indians9361.6042 Chicago White Sox8173.52614 Philadelphia Athletics7975.51316 Washington Senators7876.50617 Boston Red Sox7678.49419 St. Louis Browns6490.41631 Detroit Tigers50104.32545 Golden Age of Baseball: 1903-1952 No teams entered, exited, or changed cities Construction of old parks Change: Boston Braves Milwaukee (1953) St. Louis Browns Baltimore Orioles (1954) Philadelphia As Kansas City (1955) Brooklyn Dodgers Los Angeles (1958) NY Giants San Francisco (1958) Shibe Park (Phil) Fenway Park (Bos) Forbes Field (Pit) Comiskey Park (Chi) Navin Field (Det) Wrigley Field (Chi) Yankee Stadium (NYY) Ebbets Field (Brk)

42 Dodger Blues? Before the move Most profitable team in MLB Alone accounted for 47% of NLs profits Key Lessons No city safe Starts involvement of cities Before 1950 – only 1 stadium publicly built By 1980 – almost all were

43 What Power do Teams Have? Monopoly Power All-or-Nothing Demand Curve Winners Curse

44 Monopoly Power: Limit Output Leagues slow to expand By 1953: U.S. demographics had changed LA had no baseball teams – St. Louis had 2 Baseball & Football moved rather than expand NFL did absorb 5 teams from rival leagues MLB expanded (1961-62) Prevent new league (Continental League) Minnesota, Houston, NY Mets, LA Angels, Avert Congressional intervention (Senators) NFL expansion tied to AFL First expanded (1960) to try to kill it Next expanded (1966) to merge with it

45 All-or-Nothing Demand Curve Firms generally cant set both price and quantity Standard monopoly pricing sets price at P 1 and allows buyers to buy Q 1 Consumers earn surplus Firm earns profit Teams confront cities with an all-or-nothing choice: Point A How far can you push consumers? Consumers willing to absorb loss as long as net gain in CS is positive D Games MR MC $ P1P1 Q1Q1 Q2Q2 A Loss Surplus

46 Paper Clip Auction Guess how many clips are in the cup ($1 for closest guess) Each clip is worth $0.03 Write down your bid (and name) on a piece of paper Average bid usually lower than actual money value of clips Winning bid will generally exceed money value Why did winner overbid? Most bidders are risk averse Not all bidders have same expectations Only most optimistic bidder wins the prize Does winning the auction become the goal itself?

47 Winners Curse Buyer overbids due to uncertainty over value of prize V = Who wins? Winner expects greatest payoff – could be: Best suited to exploit opportunity Most optimistic Most intent on winning per se Olympic competition for host site V = bidders value B t = benefits of prize r = interest rate

48 Case in Point: The OlympicsOlympics 1976 Montreal: C$1.6 billion Debt ~C$1.0 billion paid over 30 years 1984 LA Only city to bid on 1984 Summer Olympics $200 million profit! 2004 Athens: $15 billion 2008 Beijing: $42 billion 2010 Vancouver: $9.2 billion 2012 London 2014 Sochi 2016 Rio de Janeiro

49 Cost of 2010 Vancouver Winter Olympics Bid budget$34,000,000 Security$900,000,000 Sea-to-Sky Highway expansion$1,980,000,000 Canada Line construction$1,900,000,000 Venue construction$580,000,000 Cypress Bowl ski facility upgrade$16,600,000 Athletes Village construction$1,080,000,000 Opening ceremonies$58,500,000 VANOC operating budget$1,750,000,000 Hillcrest/Nat Baily Stadium Park$40,000,000 Vancouver Convention Centre expansion$883,000,000 Event tickets for provincial MLAs and cabinet ministers $1,000,000 TOTAL$9,223,100,000


51 Stadium Economics Whats true about each facility in Era #1? Name of owner/builder park or field In Era #2? Reflects source of funding Municipally built In Era #3? Naming rights $2m per year What do firms get for naming rights? Era #1Era #2Era #3 Forbes FieldCleveland Municipal Stadium Network Associates Field Wrigley FieldAtlanta-Fulton County Stadium Continental Airlines Arena Shibe ParkMilwaukee County Stadium Ericsson Stadium Crosley FieldTampa StadiumMinute Maid Field Ebbets FieldOakland- Alameda County Stadium US Cellular Field Whats in a Name?

52 Size Matters Saw that baseball teams seldom sell out Why? Optimal size for baseball stadium 30-40,000 Football has larger optimal size Used to rent space from baseball teams in off-season Municipal stadia built when football took off

53 Shape Matters, Too Old School Municipal Cookie Cutters Retro Look

54 Metrodome Minneapolis, MN


56 Location: The Urban Ballpark Retro location? Stadia often not even in home city Arlington Cowboys vs East Rutherford Giants Old ballparks not built downtown > Yankee Stadium built in Goatville > Shibe Park on site of Hospital for Contagious Diseases

57 Location:Cars and Costs Fans have moved to suburbs Urban neighborhoods decay Need place to leave cars Result: a sea of asphalt Stadium is space intensive Creates problems for a downtown location Space costs money

58 The Rent Gradient Center City v. Outskirts Why are NYC hotels taller than in Zanesville, OH? Cost of land falls as move from center of town Height of buildings mimics cost curve Cost of land Distance from city center Rent gradient

59 Rent Gradient: A Circular City People evenly spread Identical stores on city edge What does A do? How does B respond? What is equilibrium location? Move to center Central business district Implication for housing prices? AB

60 Stadia and Team Values Problems in stadiums built since 1993 10 of 12 teams drew less in 2003 than last year in old park 4 most valuable teams in 2008 (Yanks, Red Sox, Mets, Dodgers) all in pre-1965 facilities New facilities still seem lucrative in NFL 8 of 10 most valuable teams in new facilities Trend in NBA or NHL?

61 Two of the perennially top-ranked college hockey teams in the country are Harvard and Yale. While tending to be alike in their national rankings, they differ greatly in their playing style. Harvard consistently opts for fast but small players while Yale fields slower but brawnier skaters. This difference in playing styles has persisted over the past several decades despite coaching changes and turnover in player personnel. What accounts for the difference? Explain in terms of economic analysis. 200 x 85 ft Yale Ingalls Rink New Haven, CT 204 x 87 ft 72.8 and 197 lbs.70.4 and 184 lbs.

62 Public Finance II Whats in it for the cities?

63 Having a football team back in Houston will bring thousands of visitors to our city, and it will generate millions of dollars in our city. Im excited about our new stadium with a retractable roof. And were also very happy about getting a Super Bowl, and as you know thats very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about. Houston Mayor Lee Brown, 1999. Without the Chiefs and the Royals, Kansas City would be nothing but another Wichita… or Des Moines… or Omaha. Kansas City mayor Emanuel Cleaver, 1997. Political Rhetoric

64 What is the role of Government? Set and enforce rules of behavior Macroeconomic stabilization Deal with monopoly Provide public goods Deal with externalities

65 What are Externalities? Costs/Benefits imposed on non-consenting people Spillover effects Negative Externalities What you do hurts me You dont compensate me Positive Externalities What you do helps me I dont compensate you

66 Impact of Negative Externality Free Market: P 1, Q 1 Games cause congestion imposes cost on others shifts supply curve left Optimal Outcome: P 2, Q 2 Free market overproduces causes DWL What can government do? D1D1 S private Games $ P1P1 Q1Q1 S social External cost P2P2 Q2Q2

67 Impact of Positive Externality D private S1S1 Games $ P1P1 Q1Q1 External benefit P2P2 Q2Q2 Free Market: P 1, Q 1 Games generate winning attitude generates benefits for others social demand is above private demand Optimal Outcome: P 2, Q 2 Free market underproduces causes DWL What can government do? D social

68 Subsidizing Team Losses Standard monopoly with high fixed costs may suffer losses Government may offer subsidies to keep team in city Subsidy = PMPM MC ATC D MR QMQM Quantity $ ATC

69 Can a Stadium be a Profit Center for a City? Revenues Rental Payments Share of Concessions, Parking, Luxury Boxes, etc. Costs Standard operating costs (labor, utilities, etc) Depreciation (facility will eventually be worthless) Opportunity Cost: could have invested $$ elsewhere Foregone tax revenue – city cant pay itself

70 Baltimore Ravens pay no rent. Chicago White Sox pay $1 per year Cleveland Indians pay rent on a sliding scale: $1.25 per ticket if A > 2.5 million $1.00 per ticket if 1.85 < A < 2.5 million $0.00 per ticket if A < 1.85 million Cleveland Cavaliers pay rent on same sliding scale as Indians San Diego Chargers City receives 10% of ticket revenue City reimburses team 100% of value of unsold tickets Ex: $50 ticket Chargers receive $27 [=(50)(.90)(.60)] if sell ticket Chargers receive $50 if dont sell ticket Examples of Stadia Rent

71 Calculating the Implicit Subsidy S = Operating Revenue – [Depreciation + Opp Cost of Funds + Foregone Taxes] Estimated Annual Subsidies ($Thousands) FacilityNOR (1) DEP (2) OCF (3) FPT (4) Subsidy (1)-(2+3+4) Green Bays Lambeau Field (Minimum) 15015315531189 Atlanta Fulton County Stadium (Average) –1,47821603,2436497,530 New Orleans Superdome (Maximum) –7,9228,57221,4004,26042,174 Note: NOR = Net Operating Revenue DEP = Depreciation OCF = Opportunity Cost of Funds FPT = Forgone Property Taxes Source: Quirk and Fort (1992).

72 Measuring the Value of a Franchise Economic Impact Studies Cost/Benefit Studies

73 Professional sports are an insignificant part of a large citys economy. For example, in Chicago, the entire professional sports industry accounts for.08 percent of Chicagos personal income. To put the matter in a somewhat different perspective, the sales revenue of Fruit of the Loom exceeds that for all of Major League Baseball (MLB), while the sales revenue for Sears is about thirty times larger than that of all MLB revenues. Robert Baade Sports Economist Lake Forest College Measuring the Value of a Franchise

74 What Do the 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 Total Impact = $65 million = ($43.6) x (1.5) Multiplier

75 Multiplier Effects Initial spending generates ripple effects Y= X + X*MPC + (X*MPC)*MPC+… Y= X*(1+MPC+MPC 2 +MPC 3 +MPC 4 +…) Y= X Example X = $35 MPC = 0.80 Where: X = initial spending Y = aggregate income MPC = ΔC / Δ Y Simple multiplier Δ Y = 35(5) = $175 The higher the MPC, the higher the multiplier.

76 Modified Multiplier M local = Example: MPC = 0.80 f = 0.5 Where f = fraction of spending that is local M local = 1.67

77 Benefits of a Franchise Direct Benefits (New Spending) Higher APC? Net exports? Players live elsewhere? Substitution effects? Indirect Benefits Positive externalities? Big league image Sense of identity And now, YOUR Columbus Blue Jackets! Chicago has 5 major league franchises Sports account for.08% of personal income MLB revenues < Fruit of the Loom Single team worth less than sizable department store Buffalo Sabres: $65 million Marietta College: $40 million

78 Costs of a Franchise Direct Costs Construction Operating Depreciation Opportunity cost of funds Indirect Costs Negative externalities Crime Congestion Noise Such costs may already have been internalized for older stadiums

79 Teams and Jobs Arizona Diamondbacks [Deloitte and Touche] 340 full-time jobs Cost to city: $240 Million $706,000 per job Baltimore Ravens [MD Dept of B&E Development] Cost per job: $127,000 - $331,000

80 Baade and Dye (1990) Impact of Stadiums and Professional Sports on Metropolitan Area Development Uses sample of 30 cities 1958-87 y it -y it-1 = b 0 + b 1 *NT it + b 2 *NS it +…+ it Neither coefficient (b 1 or b 2 ) statistically significant Growth in per capita income Number of Teams Number of Stadiums

81 Expenditure CS Other Studies Rappoport and Wilkerson (2001) looks at Quality of Life Direct approach: survey residents Indirect approach: examine housing values Coates and Humphreys (2003) look within cities Find higher property values in immediate neighborhood, but falls off rapidly D P Q Games $ Johnson, Groothuis, and Whitehead (2001): What is the most you would be willing to pay out of your own household budget each year in higher city taxes to keep the Penguins in Pittsburgh? Answer: $1.56 $50m over 30 years

82 Stadium Financing Taxes Sales Property Income User fees Debt Delayed taxes? Lotteries Voluntary tax? Issues: Revenue potential Efficiency Fairness

83 Impact of Taxes Before Tax: P 1, Q 1 Government imposes tax: supply shifts to S t After Tax: P 2, Q 2 Tax Revenue = DWL = Burden of tax Buyers pay part Sellers pay part D S StSt Hotel Rooms Q1Q1 Q2Q2 P1P1 P2P2 $ Per unit tax P 2 -t Issues: Revenue potential Efficiency Fairness

84 Tax Examples Miami Proposed sales tax on cruise ship passengers Cleveland 15-year sin tax on residents of Cuyahoga County Milwaukee (Miller Park) 5-county sales tax Regressive tax Seattle Sales tax on restaurants and bars in King County Tax on tickets to games Tax on rental cars

85 Why Do Cities Do It? Politicians pursue their own self-interest Special interest groups have their agenda Highly organized groups have advantage Concentrated benefits and dispersed costs promote rent seeking No TeamOld StadiumNew, No Frills Stadium New, Elaborate Stadium ABC, DE Simple majority vote would lead to New, No Frills Stadium All or nothing choice would lead to New, Elaborate Stadium

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