Public Finance

Fred Foldvary

Lecture notes

Kenneth Wenzer, ed. Land-Value Taxation

Classical theory of rent: returns on super-marginal land.
Neoclassical economics puts it in "producer surplus."

Chapter 4, William Vickrey:

"An efficient organization of an economy requires that all outputs be priced at their short-run marginal social cost."

Actually, not an organization of an economy, but of public finance.

For activities without large economies of scale, competitive markets are efficient.

But for natural monopolies, services with large economies of scale,

it is most efficient if the user pays only the marginal cost.

Vickrey: government can be considered an extreme case of economies of scale

where the marginal cost is zero.

One more person does not increase the cost of national defense.

Not true for some services, such as education.

Chapter 2, William Vickrey, modern theory of LVT

Like a lump-sum tax, a land-value tax is independent of the use of that property.

Chapter 3: A tax on land is non-distortionary.

No excess burden.

2: But LVT affects the use of land, inducing a more productive use of land.

LVT should distinguish between natural land value,

and property value generated by improvements,

and site value generated by neighborhood amenities.

The value due to the owner's investments should not be taxed; these are capital goods.

Chapter 3, Vickrey

The property tax

Combines a bad tax on improvements with one of the best taxes, on site value.

Like selling a computer that comes with a warranty.

The warranty could be sold separately.

What is the effect of government debt with LVT?

With LVT, government debt becomes a mortgage on the lots.

If the debt is increased, and the debt will be paid from LVT,

the debt either incurs a higher tax, or

the same tax, but without the current benefit the current tax would have paid for.

Chapter 5: Ricardian equivalence:

the proposition that government borrowing is equivalent to taxation.

It only exists with land-value taxation.

Ricardian equivalence makes Keynesian (demand-side) policy ineffective.

Deficit spending does not stimulate the economy.

(Also Ch4., p. 25. )

If labor and capital goods are mobile,

returns to these factors are equalized economy-wide, relative to productivity,

and landowners will reap much of the benefit

from greater general productivity.

Also, with P=MC for public services, rents rise as the economy is more productive.

A wholistic tax system

Land-value taxation is a component in an optimal tax system.

The other components are marginal-cost pricing for services, and

externality charges for pollution and congestion.

Ch4, p. 25: Taxes on the site rents generated by territorial services,

priced at marginal cost, are an efficient, equitable, and adequate source for the fixed costs.

P. 34: Site rents generated by the availability of goods and services

at prices reflecting marginal social cost

will be sufficient to pay for the fixed costs.

Linear model of a city

City by an ocean, uniform width.

The transportation cost is a linear function of distance.

Land beyond the city has a uniform rural rent.

Each activity has a fixed cost and a variable cost.

Land occupancy has a social cost in excluding others, and a cost of transportation service.

The marginal social cost of land occupancy is equal to

the rural rent plus the cost of additional transportation due to more land.

Total land rents in the city equal rural rent plus transportation costs.

Each activity manager uses land up to the amount where its marginal productivity equals the rent. Marginal benefits equals marginal cost.

If there are cities in competition, they will operate at the minimum of their average costs.

The use of land rent to finance the fixed costs is a requirement of economic efficiency.

Congestion pricing

Marginal cost pricing for public transit.

Externality charges for streets, highways, parking, pollution.

Trucks should pay extra becasue they cause the most wear.

A car driver or owner pays the social cost of adding to congestion.

The charge should be just high enough to prevent congestion.

Cars can carry a device to record entry into a zone.

There are scanners at zone boundaries or along a highway.

Those who wish to be anonymous can be equipped with prepaid meters.

But cameras take pictures of cars' licences.

Those who want absolute privacy should ride in a car they don't own.

Pollution charges

Remote sensors can detect pollution as cars drive by,

and send pollution charges to card that excede a threshold.

Parking charges

A parking meters is a user fee and also a rent and an externality charge.

Fixed cost meters ration by time rather than by cost.

Rationing by price is more efficient.

Congestion pricing requires a universal and flexible system.

The meter charge should be just high enough to usually have a parking place within a block.

Modern technology can provide electronic charging, incluiding in-vehicle devices.

Mass transit

It is efficient to charge the user the marginal social cost.

When mass transit is uncongested, the marginal cost is close to zero.

How should be fixed cost be paid?

Efficiently, from the rental the transit generates.

Land value is higher because of the services.

Like hotels and elevators.

Vickrey calls the use of rent a subsidy to the user,

but it is not at all like a subsidy to farmers, which serves no good economic purpose.

Users of hotel elevators do not get a true subsidy; they pay room charges.

For peak-time trips, the social cost of using mass transit is the external effect,

depriving others of a seat, and making the vehicle more crowded.

Fares should rise gradually up to the peak and then down.

Buss passes save transaction costs but act against peak-load pricing.

Why should non-users pay community rent?

A landlord can charge a higher rent.

Stores have a greater amount of business.

Also, it is common to pay for a package.

People stay at hotels without using the swiming pool or exercise room.

People rent a car without using all its features.

You pay because the package is worth it overall.

You choose a community with the best package for the cost.

ch4: Rent is higher in wealthy areas when poor areas are served with transit.

Chapter 4, Vickrey, economies of scale.

Fire protection.

Superficially, the cost seems to be related to combustible property.

About 80 percent of the cost relates to territory, not responding to fires.

We pay for the availability of the protection.

Utilities: electricity, gas, water

The fixed cost of lines, independent of use.

Chapter 5, Vickrey, Propositions.

Urban sprawl. Meaning?

The amount of land used relative to that which would be used in a pure free market.

Sprawl exists because extensive land use is subsidized, and

urban land speculation is subsidized.

Site-value taxation diminishes urban sprawl by taking the profit out.

There is more infilling and less fringe development.

Chapter 6, Harry Gunnison Brown

Land speculation

Speculation: the purchase of an asset (or short sale)

with the goal of profiting from a favorable change in its price.

Commodity speculation is market-enhancing by thickening the market,

providing more ready buyers and sellers.

But speculation can make price swings more extreme.

Speculation in some cases holds land out of use, free-riding on the future,

and in other cases, overbuilds, forcing the future.

Government-provided infrastructure, gains go to landowners, which fuels land buying.

In a pure free market, landowners would pay the costs, reducing land gains and speculation.

Holding land vacant or used suboptimally makes development leapfrog further out,

reducing productivity and wages.

LVT eliminates market-hampering land speculation.