A. Suppose that the city of Cool currently levies a property tax for public safe

Question

A. Suppose that the city of Cool currently levies a property tax for public safety at a rate of one percent of taxable value on a base of $10 million of taxable property. If the price elasticity of demand for public safety in Cool is -0.2, calculate and explain the expected effect of the grant on public safety spending, local public safety taxes, and tax rates in Cool.

B. Instead of this matching grant, suppose Cool receives a lump-sum grant of $55,000 that must be spent on public safety. If the total income of Cool residents is $22 million and the income elasticity of demand for public safety is 0.8, what is the expected effect of this grant on public safety spending and taxes?

Explanation / Answer

A) Property tax in Cool @ 1% on $10 million = 10,000,000 x 1 / 100 = $100,000

Price elasticity of demand = 100,000 / x = -0.2

That is = 50,000

Which means the percentage of grant assigned to public safet has considerably reduced, and safety rate has reduced to half a percent,.

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