Business Educators Conference BLACKLOW

Business Educators Australasia
2016 Biennial Conference
© University of Tasmania - CRICOS Provider Code 00586B
Using Public Policy to Teach Economics -
Economics, Teenagers and Policy
Dr Paul Blacklow
Tasmanian School Of Business & Economics
1

ECONOMICS, TEENAGERS AND POLICY
Teenagers, Revealed Preferences
and Optimal Choices
Elasticity, Smoking
and Tobacco Excise
Australian Education System Simplified
and Education Vouchers
© University of Tasmania - CRICOS Provider Code 00586B 2

Teenagers, Revealed Preferences
and Optimal Choices

Teenagers
• I’m no expert on teenagers (yet)
– but need to be, my eldest has just turned 13)
• Most people want their choices and actions to be
respected.
– A little less so as we age.
• Teenagers especially want their choices and actions
to be respected as recognition they are no longer
children and becoming adults.

Revealed Preferences I
• Preferences of individuals indicate which goods and
choices they prefer and indicate how enjoyment, life
satisfaction or utility they receive from them.
• Preferences of individuals can be revealed by their
purchasing habits and other choices.
– Samuelson (1938)

Utility Maximisation
• Economists model individuals’ purchasing habits and
choices as the..
* maximisation of utility
* given time, money and other constraints.
• An individual’s utility is a function of their own
unique tastes and preferences.
• We are unlikely to know another person’s complete
set of preferences and tastes, but…

Revealed Preferences II
• Each time an individual makes a choice or purchasing
decision they reveal a little of their preferences,
given their constraints.
• If I am observed purchasing flat-white coffee and
toasted vegetarian regularly for lunch.
• I must have preference for those goods for lunch
given my time and income constraints.

Optimal Choices I
• The observed purchases and choices an individual
makes can be considered the result of them
* maximising their own utility
* given their constraints.
• If individuals are rational and free to make their
own decisions then will choose what is best for
them.
• Their purchases and choices are optimal for them
given their preferences and constraints!

Optimal Choice Eg.1
• If Sam chooses to spend all Saturday morning
sleeping in.
• It is his optimal choice, given his
* preferences (maybe enjoys/needs sleep)
* constraints (little money, more time)

Optimal Choices Eg.1
• You might try dragging Sam out of bed!
• You may have some knowledge of his constraints
• But unlikely to know his full preferences or the
extent to which certain choices bring utility.
– He might enjoy sleeping a tremendous amount ???
– He may gain very little utility from other activities???

• If Lily chooses to spend Saturday mornings at
Salamanca market.
• It is her optimal choice, given her
* preferences (maybe enjoys markets, fresh air)
* constraints (little time, more money)

• You might try persuading Lily to do something
different.
• But unlikely to know her full preferences or the
extent to which certain choices bring utility.
– She may gain very little utility from sleeping in or other
activities ???
– She may have strong preference for outdoor and/or
cultural and/or shopping activities ???
– She may have a information constraint of not knowing
what else to do???

Optimal Choices - Summary
• If rational and not suffering from too many
information constraints…
• Everyone’s (including teenagers)
• Choices are optimal.
• Whenever I question my youngest 7yo daughter’s
distaste for tomatoes.
• “Daaaad, everyone has different tastes”
• “They might be best for you, but they are not best
for me”

Elasticity, Smoking
and Tobacco Excise

Price Elasticity
• Price Elasticity measures how responsive market is to
a change in price.
• Price Elasticity of Demand
where P is price, Q is quantity
• The own price elasticity is negative for all (non-giffen)
goods and so the negative sign is often ignored by
using the absolute value  

 

%
% P
Q

Price Elasticity
• How do we use it? Re-arranging the above
gives
• Thus if the price elasticity of demand is –1.37
a 10% rise in the price of the good is likely to
cause a fall in sales of 13.7%.
   % % PQ

© University of Tasmania - CRICOS Provider Code
00586B
17
Price Elasticity
• If   > 1 then demand is elastic (responsive
to price) and %Q > %P
• If  < 1 then demand is inelastic
(unresponsive to price) and %Q < %P
• If   = 1 then demand is unit elastic and
%Q = %P

Australian Tobacco Use 2011-12
• 3 million (15% of the 20 million Australian adults)
regularly smoke tobacco)
– ABS 4364.0.55.003 - Australian Health Survey: Updated Results, 2011-2012.
• Spent approximately $13.5 billion on tobacco.
– ABS 5206.0 Australian National Accounts: national income, expenditure and
product, Table 8.
• 1.7% of total Household spending and 0.94% of GDP.
– ABS 5206.0 Australian National Accounts: national income, expenditure and
product, Table 1 and Table 8.

Australian Tobacco Tax 2011-12
• The federal and state governments raised
approximately
– $7.50 billion from tobacco excise taxes
– $1.23 billion on the GST from tobacco.
– ABS 5506.0 - Taxation Revenue, Australia
• The total excise tax rate on tobacco is %157
and then the GST is applied at 10%
– http://www.tobaccoinaustralia.org.au

Tobacco Elasticity
• The elasticity of the total tobacco expenditure
(including all taxes) with respect to the after
tax price is
x
p = ∆%x/∆%p = -0.25
• The elasticity of the number of smokers with
respect to the price is
n
p = ∆%n/∆%p = -0.25

The Tax on Tobacco
• Total tobacco excise tax is %157 and the GST
of 10% is applied on top of that
• The final after tax price p given the producer
price pP is
p = pP x (1+t) x (1+gst)
= pP x 2.57 x 1.1
= 2.827 pP

The Tax on Tobacco
• By setting pP=1 our quantity is measured in
pre-tax dollars of tobacco.
• Since x = p q then q = x / p
• With x0 = $13.5b and p0=2.827
q0 = $4.775b pre-tax $ of tobacco

Tobacco Excise 200%
Consider the effect of raising the excise rate
from 157% to 200%.
• The final after tax price p is
p = 1 x (1+t) x (1+gst)
= 1 x 3.00 x 1.1
= 3.30

Tobacco Excise 200%
How much does the price increase?
• Given p0 = 2.827 p1 = 3.300
%Δp = (p1-p0 )/p0
= (3.300 – 2.827) / 2.827
= 0.473 / 2.827
= 0.167315
= 16.73%

Tobacco Excise 200%
How many smokers would give up?
• Given n
p = ∆%n/∆%p = -0.25
%Δp = 16.73%
∆%n = n
p x ∆%p
= - 0.25 x 16.73%
= - 4.2%
• 0.125m smokers (4.2% of 3m smokers)

Tobacco Excise 200%
How much would the remaining smokers spend?
• Given x
p = ∆%x/∆%p = -0.25
%Δp = 16.73%
∆%x = n
p x ∆%p
= - 0.25 x 16.73%
= - 4.2%
• Total expenditure will decrease by 4.2%

Tobacco Excise 200%
How much would the remaining smokers spend?
• A 4.1829% decrease in the total tobacco
expenditure of $13.5b is -$0.565b.
• So the remaining smokers would spend
$12.935b in total.

Tobacco Excise 200%
How much pre-tax tobacco would they buy?
• Since the price-including tax is p1 = 3.30 and
the total expenditure is x1 $12.935b
q1 = x1 / p1
=$12.935b / 3.30
= $3.920b of pre-tax tobacco.

Tobacco Excise 200%
How much GST and excise tax per year would be
raised from tobacco by the government?
$3.920b x 200%
= $7.840b in excise tax.
$3.920b x 300% x 0.10
= $1.176b in GST

Tobacco Excise 200%
By how much does the policy change
government revenue per year?
Δ Excise Tax
= $7.840 b - $7.500 b = $0.340 b
Δ GST
= $1.176 b - $1.230 b = -$0.054 b
• Over all the government revenue increases by
$0.285 Billion per year.

External Smoking Costs
External Costs
2004-05
($m)
2011-12
($m)
2011-12
($ per
smoker)
Health (net) $318 $389 $130
Production in the workplace $5,749 $7,028 $2,343
Production in the home $9,843 $12,032 $4,011
Fires $63 $77 $26
Resources used in abusive consumption $3,636 $4,444 $1,481
Less consumption resources saved $7,583 $9,269 $3,090
Total Tangible Costs $12,026 $14,700 $4,900
Intangible Costs(Loss of Life) $19,460 $23,787 $7,929
Total Cost $31,486 $38,487 $12,829
Collins D., and Lapsley H., (2008) The Cost of Tobacco, Alcohol and Illicit Drug Abuse to
Australian Society in 2004/05, Commonwealth of Australia, Department of Health and Ageing

Tobacco Excise 200%
0.125m Smokers that give up?
• Initially personally worse off as they adjust.
• Reduce costs to society by
– $12,829 x 0.125 m = $1,603m

Tobacco Excise 200%
2.875m Smokers that remain?
• Personally worse off!
• Paying 16% more for the same product.
• Cut their smoking spending by 4% so could
estimate a 4% cut in costs to society by
– $12,829 x 4.875 m x 4% = $1,475m

Tobacco Excise 200%
17 Million Non-Smokers ?
• No personal effect
• But Government budget balance improves by
$0.285 billion.
• And external social costs have been reduced
by $3b.

Australian Education System
Simplified and Education Vouchers

• There are approximately 2 million public school students in
Australia and 1 million private school students.
• The Federal and State governments combined spend
approximately $48 billion on public education and $12 billion
on private education per year.
• Private schools raise an additional $12 billion from fees per
year.
• Assume that public and private schools are equally efficient,
so that $1 of funding to either system has the same effect.
Minister for
Education –
Senator Simon
Birmingham

1 million private students
• $12b from government + $12b from fees
• The average funding per student is $24,000 per student.
• Price is effectively $0.50 per $ of education
• $24b from government
• The average funding per student is $24,000 per student.
• Price is effectively $0.00 for $24,000 of education

If parents are willing to pay less than $12,000 on their child’s
education. Suppose they are WTP = $8,000.
Private: $8,000 from parents at $0.50 per $ of education
$16,000 worth of education
vs
Public: $0 from parents + $24,000 from government
$24,000 worth of education
Public Education is a clear choice
it has more education and more money for parents.

If parents are willing to pay more than $12,000 on their child’s
education. Suppose WTP = $16,000.
The choice between -$16000 and $32,000 education vs
$0 and $24,000 education
Would normally be determined by preferences and we could
not know someone’s choice.
Except that we have assumed they are willing to pay $8000 and
So will choose private education.

• Have parents with WTP greater than $12,000
2 million public students
• Have parents with WTP less than $12,000
• WTP incorporates income and other constraints as well as
preferences for education.

A (Revenue Neutral) Education Voucher
• If the all government education funding of $60b was shared
out equally to all 3 million students as a education voucher it
would be worth $60,000 million/ 3 million =
$20,000 per student.
• There would be no public schools.
• There would be no government funding to private schools
(other than the voucher) so that price of education becomes
$1.00 for a $ of education.

Does the voucher system make parents better off?
• Yes for some no for others!
• Can you identify which types of parents would be better off
and worse off?
Will it result in better student outcomes?
• Yes for some no for others!
• Can you identify which students would have better outcomes
or worse outcomes?

Consider who parents were WTP less than $12,000 on their
child’s education.
Existing System
Spend $0 and get $24,000 worth of public education.

Suppose their WTP was $4,000
If they spend the same as before $0 + $20,000 voucher now they
will get $20,000 worth of education ($4,000 less education).
or
If they spend $4,000 + $20,000 voucher they will get the same
amount of education as before $24,000 ($4,000 less money)
Worse off

If their WTP does not change at all they will still wish willing to
pay $4000 + $20000 voucher and so a student would receive the
same education $24,000 worth for WTP = $4000.
If WTP = $2000 then students get $22,000 education
if WTP < 4000 less education
if WTP > 4000 more education

Consider who parents were WTP more than $12,000 but less
than $20,000 on their child’s education.
For example suppose their WTP was $16,000.
Existing System
Spend $16,000 to get $32,000 worth of private education.

Consider who parents were WTP more than $12,000 but less
than $20,000 on their child’s education.
If they spend the same as before $16,000 and their voucher now
they will get $36,000 worth of education ($4,000 more
education).
or
If they spend $12,000 + $20,000 voucher they will get the same
amount of education as before $32,000 ($4,000 more money)
Better off (and more education, if no change in WTP)

Consider parents who were WTP more than $20,000 on their
Suppose their WTP was $30,000.
Existing System
Spend $30,000 and get $60,000 worth of private education.

Consider parents who were WTP more than $10,000 on their
Voucher System
If they spend the same $30,000 + $20,000 voucher they will get
$50,000 worth of education ($10,000 less education).
If they spend $40,000 + $20,000 voucher they will get $60,000
worth of education (but have $10,000 less money)
Worse off (and less education, if no change in WTP)

Extensions
• Could discuss and examine changes to WTP.
• Reaction to vouchers.
• Probably should split private into independent and other
(mainly Catholic) schools.

The End

Business Educators Conference BLACKLOW

Recomendados

Recomendados

Mais conteúdo relacionado

Destaque

Destaque (6)

Semelhante a Business Educators Conference BLACKLOW

Semelhante a Business Educators Conference BLACKLOW (20)

Business Educators Conference BLACKLOW