Question

APPLYING THE CONCEPTS For exercises that have blanks ( ), fill each blank with a single word or number. For exercises with ellipses (...), complete the statement with as many words as necessary. For exercises with words in square brackets ([increase, decrease]), circle one of the words.

1. Property Tax versus Square-Foot Tax In Metro, there are three types of houses: E (expensive), M (medium), and C (cheap). Each household prefers the same spending on public education. Schools are initially financed with the property tax based on market value, and initially there are three school districts. Suppose the property tax is replaced by a square-foot tax (for example, \$2 per square foot of living space per year). The equilibrium number of school districts will decrease to one if ... because....

Answer 1

The switch to a square-foot tax can lead to a decrease in the number of school districts to one, as it creates a more uniform basis for taxation and removes disparities in funding caused by property market values.

Step-by-step explanation:

When a property tax, which is based on the market value of houses, is replaced by a square-foot tax, the equilibrium number of school districts can decrease to one. This change might occur if all types of houses (expensive, medium, and cheap) are taxed uniformly based on their size in square footage rather than their market value. Since each household prefers the same level of spending on public education, the revenue from the square-foot tax would be distributed evenly across a single school district, rather than creating disparities based on property values. This move towards a more uniform tax could lead to a reorganization that culminates in one school district, as differences in funding attributed to property market values would be eliminated.