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Business Educators Conference BLACKLOW
1.
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
2.
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
3.
Teenagers, Revealed Preferences and
Optimal Choices © University of Tasmania - CRICOS Provider Code 00586B 3
4.
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. © University of Tasmania - CRICOS Provider Code 00586B 4
5.
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) © University of Tasmania - CRICOS Provider Code 00586B 5
6.
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… © University of Tasmania - CRICOS Provider Code 00586B 6
7.
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. © University of Tasmania - CRICOS Provider Code 00586B 7
8.
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! © University of Tasmania - CRICOS Provider Code 00586B 8
9.
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) © University of Tasmania - CRICOS Provider Code 00586B 9
10.
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??? © University of Tasmania - CRICOS Provider Code 00586B 10
11.
Optimal Choices Eg.2 •
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) © University of Tasmania - CRICOS Provider Code 00586B 11
12.
Optimal Choices Eg.2 •
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??? © University of Tasmania - CRICOS Provider Code 00586B 12
13.
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” © University of Tasmania - CRICOS Provider Code 00586B 13
14.
Elasticity, Smoking and Tobacco
Excise © University of Tasmania - CRICOS Provider Code 00586B 14
15.
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 © University of Tasmania - CRICOS Provider Code 00586B 15
16.
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 16
17.
© 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
18.
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. © University of Tasmania - CRICOS Provider Code 00586B 18
19.
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 © University of Tasmania - CRICOS Provider Code 00586B 19
20.
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 © University of Tasmania - CRICOS Provider Code 00586B 20
21.
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 © University of Tasmania - CRICOS Provider Code 00586B 21
22.
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 © University of Tasmania - CRICOS Provider Code 00586B 22
23.
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 © University of Tasmania - CRICOS Provider Code 00586B 23
24.
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% © University of Tasmania - CRICOS Provider Code 00586B 24
25.
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) © University of Tasmania - CRICOS Provider Code 00586B 25
26.
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% © University of Tasmania - CRICOS Provider Code 00586B 26
27.
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. © University of Tasmania - CRICOS Provider Code 00586B 27
28.
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. © University of Tasmania - CRICOS Provider Code 00586B 28
29.
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 © University of Tasmania - CRICOS Provider Code 00586B 29
30.
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 $0.285 Billion per year. © University of Tasmania - CRICOS Provider Code 00586B 30
31.
External Smoking Costs ©
University of Tasmania - CRICOS Provider Code 00586B 31 External Costs 2004-05 ($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
32.
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 © University of Tasmania - CRICOS Provider Code 00586B 32
33.
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 © University of Tasmania - CRICOS Provider Code 00586B 33
34.
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. © University of Tasmania - CRICOS Provider Code 00586B 34
35.
Australian Education System Simplified
and Education Vouchers © University of Tasmania - CRICOS Provider Code 00586B 35
36.
Australian Education System
Simplified • 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. © University of Tasmania - CRICOS Provider Code 00586B 36 Minister for Education – Senator Simon Birmingham
37.
Australian Education System
Simplified 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 2 million private students • $24b from government • The average funding per student is $24,000 per student. • Price is effectively $0.00 for $24,000 of education © University of Tasmania - CRICOS Provider Code 00586B 37
38.
Australian Education System
Simplified 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. © University of Tasmania - CRICOS Provider Code 00586B 38
39.
Australian Education System
Simplified 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. © University of Tasmania - CRICOS Provider Code 00586B 39
40.
Australian Education System
Simplified 1 million private students • 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. © University of Tasmania - CRICOS Provider Code 00586B 40
41.
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. © University of Tasmania - CRICOS Provider Code 00586B 41
42.
A (Revenue Neutral)
Education Voucher 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? © University of Tasmania - CRICOS Provider Code 00586B 42
43.
A (Revenue Neutral)
Education Voucher 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. © University of Tasmania - CRICOS Provider Code 00586B 43
44.
A (Revenue Neutral)
Education Voucher Consider who parents were WTP less than $12,000 on their child’s 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 © University of Tasmania - CRICOS Provider Code 00586B 44
45.
A (Revenue Neutral)
Education Voucher Consider who parents were WTP less than $12,000 on their child’s education. 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 = $6000 then students get $26,000 education If WTP = $12000 then students get $32,000 education if WTP < 4000 less education if WTP > 4000 more education © University of Tasmania - CRICOS Provider Code 00586B 45
46.
A (Revenue Neutral)
Education Voucher 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. © University of Tasmania - CRICOS Provider Code 00586B 46
47.
A (Revenue Neutral)
Education Voucher 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) © University of Tasmania - CRICOS Provider Code 00586B 47
48.
A (Revenue Neutral)
Education Voucher Consider parents who were WTP more than $20,000 on their child’s education. Suppose their WTP was $30,000. Existing System Spend $30,000 and get $60,000 worth of private education. © University of Tasmania - CRICOS Provider Code 00586B 48
49.
A (Revenue Neutral)
Education Voucher Consider parents who were WTP more than $10,000 on their child’s education. 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) © University of Tasmania - CRICOS Provider Code 00586B 49
50.
A (Revenue Neutral)
Education Voucher Extensions • Could discuss and examine changes to WTP. • Reaction to vouchers. • Probably should split private into independent and other (mainly Catholic) schools. © University of Tasmania - CRICOS Provider Code 00586B 50
51.
The End © University
of Tasmania - CRICOS Provider Code 00586B 51
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