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Chapter 5: Q11. (page 114)

What are the pluses and minuses of corporate location subsidies? Why do politicians like them so much? Would you be surprised to know that many of the 238 cities bidding for Amazon's HQ2 offered much larger location subsidies than did New York City and Alexandria, Virginia? Explain.

Short Answer

Expert verified

The corporate location subsidies have a plus—they act as an incentive for development—and a minus—they are a waste of taxpayers' money.

Politicians like them because it can help them win upcoming elections.

There's no surprise that the other cities might have offered higher corporate location subsidies. Each city will want to have such a giant technological company for faster growth and development.

Step by step solution

01

Comparing the pluses and minuses of corporate location subsidies

The corporate location subsidies bring its pluses and minuses together. The corporate location subsidies catalyze the location's development. The establishment of a company leads to the advancement of technology in the area, the scope for other businesses, more employment opportunities, increased earnings, better physical and social infrastructure, and, thus, overall development of the area.

For example, the establishment of energy company Con Edison in lower Manhattan in 1823 helped New York City to develop. It facilitated the energy needs of the city, so other businesses got encouraged. It also expanded the employment opportunities in the area, and the income of individuals increased.

However, the companies will ultimately set up only in those locations that provide other supporting conditions apart from location subsidies for their business. Factors like availability of inputs, distance from the market, transportation costs, and others also matter when a producer tries to minimize cost and maximize the output.

The companies might choose the location irrespective of the location subsidies. In such cases, corporate location subsidies prove to be a waste of the city government's revenue.

02

Politicians favor location subsidies 

Politicians favor corporate location subsidies as they bring goodwill to them. Companies coming to their respective cities because of these subsidies foster their development. This influences the decision-making of the locals in favor of the politicians.

These subsidies provide politicians with a campaign plan for the next elections.

03

Reason why larger location subsidies were offered for Amazon's HQ2

It's no surprise that the cities other than New York and Alexandria offered enormous subsidies for Amazon's HQ2. Amazon's HQ2 can bring exponential growth and development for any region. The growth and development will cater to the benefits of the politicians in that region to get re-elected.

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Most popular questions from this chapter

Explain: “Politicians would make more rational economic decisions if they weren’t running for re-election every few years.”

Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe a housing inspector into approving a substandard building.

a. If bribes cost \(1,000 each, how much will a housing inspector make each year in bribes? (Assume that each inspector works 52 weeks a year and gets bribed for every house he or she inspects.)

b. There is a provincial construction supervisor who gets to hire all of the housing inspectors. He himself is corrupt and expects his housing inspectors to share their bribes with him. Suppose that 20 inspectors work for him and that each passes along half the bribes collected from builders. How much will the construction supervisor collect each year?

c. Corrupt officials may have an incentive to reduce the provision of government services to help line their own pockets. Suppose that the provincial construction supervisor decides to cut the total number of housing inspectors from 20 to 10 in order to decrease the supply of new housing permits. This decrease in the supply of permits raises the equilibrium bribe from \)1,000 to \(2,500. How much per year will the construction supervisor now receive if he is still getting half of all the bribes collected by the 10 inspectors? How much more is the construction supervisor getting now than when he had 20 inspectors working in part b? Will he personally be happy with the reduction in government services?

d. What would happen if reducing the number of inspectors from 20 to 10 only increased the equilibrium bribe from \)1,000 to $1,500? In this case, how much per year would the construction supervisor collect from his 10 inspectors? How much less is the construction supervisor getting than when he had 20 inspectors working in part b? In this case, will the construction supervisor be happy with the reduction in government services? Will he want to go back to using 20 inspectors?

Use the distinction between the characteristics of private goods and public goods to determine whether the following should be produced through the market system or provided by government: (a) French fries, (b) airport screening, (c) court systems, (d) mail delivery, and (e) medical care. Explain your answers.

On the basis of the three individual demand schedules in the following table, and assuming these are the only three people in the society, determine (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good.

P($)QdD1
QdD2
QdD3
8010
7020
6031
5142
4253
3364
2475
1586

"The problem with our democratic institutions is that they don't correctly reflect the will of the people! If the people—rather than self-interested politicians or lobbyists—had control, we wouldn't have to worry about the government taking actions that don't maximize allocative and productive efficiency." Critique.
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