Governor Smith is upset that so many students who receive a subisidized educatio

Question

Governor Smith is upset that so many students who receive a subisidized education in the UT system move to Atlanta after graduating. one recomendation from a student is to designate a 5 by 5 mile area in Knoxville as the "Knoxville College Zone." Students who move here upon graduation will receive tax credits worth 10,000 per year for a few years after graduation

a) You would expect this subisdy to attract more students to Knoxville than Atlanta only if its economic incedence falls on the students. Wages are not affected by the subsidy, so economic incedence of the subsidy must be split in some way between the landlords in the zone and students. Would you expect the incidence to fall more on graduating students if building new housing in the zone is easy (elastic housing supply) or hard (inelastic housing supply)? Why?

b) you are told that students' demand for housing in the zone is very elastic (nD =-4) but that it is somewhat difficult to add new housing (Ns=1). From an economic standpoint, how much of the $10,000 would go to students moving to the zone. How much would go to the landlords?

c) If rent in the zone would have been $10000 per year without the subsidy, and 20,000 students would have lived in the zone without the subsidy, how many students will live in the zone if the subsidy is introduced?

Explanation / Answer

Yes.

Since the students will get tax credits along with the same wage rates, they will be left with higher disposable incomes, making them better off.

Incidence of anything falls more on the inelastic side. Thus, if the building new housing in the zone is hard, incidence will fall less on the graduating students.

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