Case Studies for Public Economics 505

I. Public Goods:

Background—The principal industry of this small (10,000) resort town is tourism. Fishing and boating bring many tourists to the area and the town has considerable water-front property and 50% of this property is owned by the state and the city. The all-year round residents are largely families with school age kids. There are few retirees in the town. The income of the community is about 10% below the median for the state. A large number of residents (about 30%) have boats and they often complain about the high private fees at the marina. The current schools have insufficient surrounding land available for public recreation, especially soccer and ball fields. There also no public marinas or beaches within the town limits. The state of Alabamabad returns 1% of a state levied sales tax to the town but the money must be spent on infra-structure or buildings, structures, or other public facilities that have a life span of over 15 years.

Your task--- Assume you are senior staff to the town manager and she asks you make a recommendation for how an annual $2 million dollars should be spent. Opportunity costs reveal that the community prefers one of the two options below but the town cannot afford both. Using your knowledge of public goods and the financial restrictions given in the case, which investment below would you recommend and why. Make your strongest arguments for one choice but also indicate why the other choice was not preferred.

1. Purchase a marina and use annual sales tax to pay off the loan on the marina. The slip fees for residents would be extremely reasonable and not prohibitive but 50% of the slips would be reserved for tourists who would pay the going rates. The marina could also lease space to businesses like restaurants and tackle shops.
2. Purchase enough acreage to build a multi-purpose park including ball fields of all kinds and a jogging trail. The recreation department head recommends only a nominal charge for organized leagues, other wise usuage would be free to the community although he notes that tourists might be hard to exclude from use. Since the sales tax money would not cover maintenance and permit fees would be limited, the town would have to use general funds to pay for day to day maintenance.

II. Negative Externalities:

Background: The city of Ranier is now 100,000 and growing like grass. On the main highway leading into the town, the city has allowed many commercial businesses to locate. 80% of the businesses are either fast food restaurants or businesses which litter their surrounding areas. The downtown area is very well kept and a banking and financial center for the region. The strip development on the main highway generates a great deal of litter from its customers and boxes and materials left over from the shipping of commercial products. Even the grass median on the highway looks like a battlefield with bottles, wrappers, bags, boxes, batteries, tires, etc.

Task: The Mayor and Council ask your policy firm to recommend to them how to internalize the major negative externalities that exist on and near this highway. They believe it is not the fault of the customer but rather the fault of the businesses in this area. What would you recommend to the city? If you think it is mainly the customers’s fault, make recommendations for what to do with them. Otherwise focus on businesses in your policy efforts.