4) Suppose the federal government were to levy a national property tax on all housing in the United States. Assume that all households are renters, are perfectly mobile, and have homogenous tastes.
a) Assuming the money raised by the property tax is wasted, which parties (landlords, capital owners, or consumers) are likely to bear the incidence of this tax? Why? State clearly any auxiliary assumptions necessary to arrive at your conclusion.
b) Now suppose that the money is not wasted. Rather it is spent on reducing class sizes at public schools. Suppose households value the reduction in class size by more than the dollar cost of the tax. What will happen to the price of land and the price of homes?
5) The most common mode of transportation in the U.S. is by automobile. Automobiles generate a variety of externalities via their effects on traffic, fatalities, and the environment. This leads most economists to suspect that the level of driving in the U.S. is far above its efficient level.
a) A standard suggestion of economists is to levy a tax on behavior generating negative externalities. Suppose we choose to impose a tax on gasoline because it is highly complementary with driving. Show and explain, using a diagram, the factors determining the optimal gasoline tax.
b) In practice much of the information necessary to determine the optimal gas tax is difficult to come by. Suppose, in order to make up for its recent budget shortfall, the state of California decides to levy a statewide tax of two dollars a gallon on gasoline. What are some indicators we could look at to determine whether this tax is too large from a social efficiency perspective?
c) An alternative to taxing gasoline is to subsidize public transportation. Why might such subsidies be relatively ineffective at reducing automobile usage?