Free Market Level Research Articles

Measuring the Stringency of Land Use Regulation: The Case of China's Building Height Limits

This paper develops a new approach for measuring the stringency of a major form of land use regulation, building height restrictions, and applies it to an extraordinary data set of land-lease transactions from China. Our theory shows that the elasticity of land price with respect to the floor area ratio (FAR), a building height indicator, is a measure of the regulation's stringency (the extent to which FAR is kept below the free-market level). Using a national sample, estimation allowing this elasticity to be city-specific shows variation in the stringency of FAR regulation across Chinese cities. Single-city estimation for Beijing shows that stringency varies with site characteristics.

Measuring the Stringency of Land-Use Regulation: The Case of China's Building-Height Limits

This paper develops a new approach for measuring the stringency of a major form of land-use regulation, building-height restrictions, and it applies the method to an extraordinary dataset of land-lease transactions from China. Our theory shows that the elasticity of land price with respect to the oor-area ratio (FAR), an indicator of the allowed building height for the parcel, is a measure of the regulation’s stringency (the extent to which FAR is kept below the free-market level). Using a national sample, estimation that allows this elasticity to be city-specific shows substantial variation in the stringency of FAR regulation across Chinese cities, and additional evidence suggests that stringency depends on certain city characteristics in a predictable fashion. Single-city estimation for the large Beijing subsample, where site characteristics can be added to the regression, indicates that the stringency of FAR regulation varies with certain site characteristics, again in a predictable way (being high near the Tiananmen historical sites). Further results using a different dataset show that FAR limits in Beijing are adjusted in reponse to demand forces created by new subway stops.

Evaluating competing theories of informal employment: some lessons from a 28-nation European survey

Informal employment has been variously explained as resulting from: economic under-development and a lack of modernisation (modernisation theory); high taxes and state interference in the free market (neo-liberal theory) or inadequate levels of state intervention to protect citizens (political economy theory). The aim of this paper is to evaluate these competing theories by comparing the findings of a 2013 survey on the variations in the prevalence of informal employment across 28 nations with cross-national variations in the economic and social characteristics each theory denotes as determinants. The finding is that informal employment is less prevalent in wealthier, modernised societies with higher levels of taxation and social protection expenditure, more effective social transfer systems and lower levels of severe material deprivation. No evidence is thus found to support neo-liberal theory, but evidence is found to support the modernisation and political economy theories. The paper concludes by discussing the theoretical and policy implications.

Explaining Cross-national Variations in the Size of the Shadow Economy in Central and Eastern Europe

Cross-national variations in the size of the shadow economy have been variously explained to be a result of: economic underdevelopment (modernization theory); high taxes, public sector corruption and state interference in the free market (neoliberal theory) or inadequate levels of state intervention to protect workers (political economy theory). The aim of this paper is to start to evaluate critically these competing theories by comparing cross-national variations in the size of the shadow economy with the various aspects of the broader economic and social environment denoted as determinants of the shadow economy in each of the theories. The finding is that across Central and Eastern Europe, smaller shadow economies prevail in wealthier, more modern and equal societies and countries with higher levels of social protection expenditure, greater state intervention in the labour market, more effective social transfers and lower levels of poverty. No evidence is, therefore, found to support the neoliberal suggestion that decreasing tax rates, deregulating the economy and cutting back work and welfare expenditure by the state will reduce the shadow economy. The paper concludes by discussing the theoretical and policy implications of the findings.

Energy consumption and economic growth: The case of oil exporting countries

This paper examines the causal relationship between the per capita energy consumption and the per capita GDP in a panel of 11 selected oil exporting countries by using panel unit-root tests and panel cointegration analysis. The results show a unidirectional strong causality from economic growth to energy consumption for the oil exporting countries. The findings have practical policy implications for decision makers in the area of macroeconomic planning. In most major oil exporting countries, government policies keep domestic prices bellow free market level, resulting in high levels of domestic energy consumption. The results imply that the energy conservation through reforming energy price policies has no damaging repercussions on economic growth for this group of countries.

An Empirical Look at State Income: Taxation of Major League Baseball Players

The large increases in athletes' salaries have prompted states to exercise their rights to tax nonresident professional ballplayers. The general trend has been for each state to levy its tax rate on part of the salary of each player for games played within the state. The result is a complex system with extra burdens for players, owners, and states. In response some of the constituencies and the Federation of Tax Administrators have proposed that all states adopt the same methodology for taxation. This paper summarizes the evolution of the system where states tax nonresident athletes. It also presents the impacts of some of the proposed tax polices and provides insight as to the direction of future tax policy. The varied state tax polices affect players, team owners, and states. Every player has to comply with multiple tax codes, each with a different tax rate and possibly a different system for allocating how much of the player's income is taxable. State tax administrators are affected because they need to determine how much income should be taxed, which tax payments should be offset by a credit, and if the correct amounts of taxes have been paid. These effects are more complicated when multiple state tax laws and rates are applied to a tax return. Furthermore, the chance of error in making a determination rises as the process becomes more complex. Team owners are affected because they must supply tax information about their players to numerous states. However, a stronger impact is that different taxing methods may affect a team's position when negotiating salaries with players. On the surface a team in a state that has a zero or low income tax rate has a recruiting advantage; however, that argument is not as effective if other states tax part of the players' incomes. TERMINOLOGY To facilitate the explanations and discussions, this section summarizes four methods for taxing professional athletes. The first three are the home state method, the games played method, and the duty days method. These methods are so named by a tax attorney, Jeffery Krasney, in an article advocating standardization of the tax treatment for athletes. (1) The fourth method, the tax credit method, is the tax policy currently in force in many states; the current authors propose its name. 1. The home state method: An athlete's entire income is taxed only by the state where the athlete plays home games. 2. The games played method: Each state taxes an athlete on the number of games the athlete plays in the state. 3. The duty days method: The amount of tax paid by an athlete to a state is based on the number of days that the athlete is contractually obligated by his team to spend in the state. 4. Tax credit method: Each state taxes the entire income of athletes who play home games in the state, but the tax is reduced by a credit equal to the amount of income taxes paid to other states. Each state also taxes the income of athletes of teams based in other states, and the amount of tax is related to the number of games played in the state. HOW IT ALL BEGAN Each state has had the right to tax nonresidents on income earned in the state since a 1920 federal court decision. (2) However, during the era in which athletes' salaries were held well below the free market level with such arrangements as the reserve clause, states had little incentive for taxing nonresident athletes. Rather, states routinely used the home state method of taxing players, in which all of a player's income was taxed in the state in which his team was located. The only wrinkle to this policy was the situation in which a player played for a team in one state but claimed a different state as his domicile. In these cases players were often levied an income tax in both states, although it was not uncommon for tax credits to be granted by the domicile state for taxes paid in the state of employment. Regardless the ultimate result was that the home state method applied--that is, only the state where the athlete played home games taxed the athlete's entire income. …

Rent stabilization and the long-run supply of housing

This paper examines the impact of moderate rent controls on the construction and replacement of urban housing. It studies a common form of rent regulation that limits rent growth to below-market increases but permits landlords to set the base rent at free market levels and allows them to re-set rents when the incumbent tenant vacates, after which rents are re-controlled (‘vacancy decontrol–recontrol’). One of the primary insights is that neither the timing nor the density of construction is affected by rent stabilization when base rents are perfectly flexible. Allowing landlords to set the initial contract rent lets them capture the benefits to the renter of rent stabilization. Perfect capitalization of rent stabilization into a higher base rent provides the landlord with a free market rate of return and thus does not distort development activity. However, redevelopment of land will be hastened because rent stabilization complemented by vacancy decontrol–recontrol increases the difference between rents before and after redevelopment, increasing the opportunity costs of postponing redevelopment. Extensions include an analysis of other common rent regulations and the impact of rent stabilization on the urban rent gradient.

Issues in Domestic Petroleum Pricing in Oil-Producing Countries

This paper discusses issues relating to the domestic pricing of petroleum in oil-producing countries. It finds that in most major oil-exporting countries, government policies keep domestic prices below free-market levels, resulting in implicit subsidies that equaled 3.0 percent of GDP, on average, in 1999. Moreover, the paper argues, these petroleum subsidies are inefficient and inequitable-entailing substantial opportunity costs in terms of forgone revenue or productive spending-and also procyclical, complicating macroeconomic management. Nonetheless, the elimination of petroleum subsidies is often politically difficult, although countervailing measures and publicity campaigns can help engender support for reform.

Issues in Domestic Petroleum Pricing in Oil-Producing Countries

This paper discusses issues relating to the domestic pricing of petroleum in oil-producing countries. It finds that in most major oil-exporting countries, government policies keep domestic prices below free-market levels, resulting in implicit subsidies that equaled 3.0 percent of GDP, on average, in 1999. Moreover, the paper argues, these petroleum subsidies are inefficient and inequitable-entailing substantial opportunity costs in terms of forgone revenue or productive spending-and also procyclical, complicating macroeconomic management. Nonetheless, the elimination of petroleum subsidies is often politically difficult, although countervailing measures and publicity campaigns can help engender support for reform.

Cost Allocation for Multiuse Water Systems in Egypt

Two considerations motivated this study of the operation, maintenance, and rehabilitation (OM&R) costs of Egypt's Nile River irrigation system. The first is the deteriorating operating condition of the numerous structures that compose the system. The second derives from the major changes in financial policies being instituted by the government of the Arab Republic of Egypt (GOARE), particularly those related to the agricultural sector. New policies will allow farmers to sell more freely on the open market and will permit most farm commodity prices to move toward international free market levels. Because of these new pricing policies, the GOARE must seek new revenue sources to replace the old ones. The overall objective of this study was to determine the net OM&R costs of the main irrigation and water supply system in Egypt, as it is currently supported, and what those costs might be under an enhanced or acceptable budget allocation. The analysis is limited to OM&R costs of the main system, defined as the ...

The failure of strategic industrial policies due to manipulation by firms

The home government announces an export subsidy before a home firm and a foreign rival compete in a third market. Anticipating the subsidy, either home or foreign firms may increase their output-cost-savings investments. Anticipatory investments in either country may cause domestic welfare to fall below its free market level. Similarly, if both home and foreign governments use strategic industrial policies, welfare may fall in one or both countries.

Agricultural Policies and Performance in the Gambia

The paper examines the performance of Gambian agriculture in relation to the past and present government policies that have been implemented for the development of the sector. Gambian agriculture is still largely based on the traditional system of shifting cultivation using very small independent farming units. Yields are generally low. Post-independence agricultural policy focused on institution building and hence encouraged the creation of agricultural institutions, kept producer prices low and highly subsidized agricultural inputs. Gambian agriculture has been unable to respond greatly to these inducements and other initiatives as yields remain practically stagnant and production revolves around a declining trend. The faulty implementation of subsidized credit programme resulted in regressive income transfer to a small group of influential Gambians who defaulted on large loans. The result was a weakening of the financial system and the collapse of development banks. There was a policy turn-around during the economic recovery programme and the subsequent programme for sustained development. Agricultural input subsidies are being progressively removed to assure long term policy sustainability though producer prices are still lower than the free market levels. Agricultural employment policy focuses on self-employment and the development of informal sector employment. As the size of formal agriculture is small, the wage policy had no immediate relevance and is under consideration for removal.

An Alternative Rationale for Financial Dualism: Note

Financial repression is a policy of imposing effective ceilings on interest rates that banks are allowed to charge firms, for the purpose of stimulating investment. Critics (for example, Lanyi and Saracoglu 1983 and Fry 1988) make two charges. First, the low interest rates discourage savings, thereby limiting total investment. Second, the low interest rates together with government allocation policies tend to direct investment toward low marginal productivity projects while higher marginal productivity projects go unfunded. Furthermore, financial repression is usually accompanied by an active black market for loans, known as the curb market. The system of a free curb market operating alongside a financially repressed banking system is referred to as financial dualism. Curb markets are generally thought to be an undesirable consequence of financial repression because they permit tax evasion and limit monetary policy effectiveness (Chandavarkar 1985). However, the government does little to discourage them. Recently, new structuralists (van Wijnbergen 1983 arldiaylor 1983) have argued that the curb market is more efficient at providing needed financial intermediation than the banking system because it is not subject to reserve requirements.l In this paper, we abstract from this issue and develop an alternative rationale for the permissive policy of governments toward the curb market. We show that financial dualism can stimulate total investment, compared to the free market level, and that it need not sacrifice high productivity projects for low productivity ones.2 The proof is conducted in the context of a standard portfolio balance model, generalized to allow savings to depend on interest.

Industrial Sickness, Primary and Secondary: The Effects of Exit Constraints on Industrial Performance

In an attempt to protect workers from unemployment, governments in some countries subsidize firms which would otherwise fail. This article examines the effects of such subsidies on output, prices, and welfare. It also briefly reviews the effects for varying price elasticities of supply and demand, for nontraded and fully traded goods, and for firms in which wages exceed their free market level. If the firm produces a nontraded good, the “sickness” of one firm that is subsidized to maintain production can spread to other firms that would be viable in the absence of the subsidies. The analysis shows that the exit constraints have the most detrimental effect when the elasticity of demand is low and supply elasticity is high, and when the government weighs the welfare of the firm's workers and consumers less than that of the general taxpayers and the firm owners. When labor costs are higher than their free market levels and output is thus less than the optimal levels, the subsidies could have an effect similar to that of an optimal production subsidy. In practice, however, this possibility is likely to be outweighed by associated rent-seeking costs and other distortions.

COMMODITY EXPORT BOOMS IN DEVELOPING COUNTRIES

This article surveys the experiences of commodity-exporting countries faced with resource discoveries and widely fluctuating world prices. Poor boom management leads to major internal and external economic imbalances. Many developing countries overconsume during boom periods. More often than not, the unsustainable increases in spending are initiated by the public sector. When the boom ends, tardiness in decreasing government spending and in increasing revenues from nonbooming sectors creates fiscal deficits and monetary control problems. In the 1970s many booming economies allowed regulated price structures, and particularly exchange rates, to deviate substantially from free market levels, discouraging efficient resource allocation and greatly compounding the problems of adjustment to subsequent drops in export prices. Countries that managed booms well were typically those that did not allow fiscal variables, exchange rates, agricultural producer prices, and wages to get badly out of line; avoided indulging in wasteful and inefficient investment; limited increases in government spending; and maintained prudent external borrowing and foreign exchange reserve policies.

Too Much Investment: A Problem of Asymmetric Information

This paper shows that under plausible assumptions, the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level. Raising the rate of interest above the free market level will restore optimality. This conflicts with generally held views and is contrasted with the Stiglitz-Weiss model. It is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance. However, under the Stiglitz-Weiss assumptions, used to derive an underinvestment result, equity is shown to be the equilibrium method of finance.

THE CASE AGAINST COMPULSORY MINIMUM STANDARDS

Legislation to forbid the sale of goods that do not meet minimum standards imposes substantial costs on producers, distributors and consumers, but the main benefit, a reduction in search costs, is unimportant unless the standard affects health or safety.Benefits also arise when someone other than the consumer bears the cost of inferior goods. In the longer run, production levels and methods may change but economic costs will probably remain above the free market levels. In the short or long run consumers may benefit by being able to buy better quality goods at the same price, but this is unlikely so the onus is on the legislator to justify imposing compulsory minimum standards.

Some Effects of Protection in the World Sugar Industry

seriously restrain consumption of the commodities in question, and hence the trade in them. It has been pointed out that these restrictive measures reduce sales and prices in world markets, and are harmful to the economies of those countries highly dependent on them. To the best of my knowledge, however, no estimates have been published of the extent to which consumption and production are restrained by these impositions. This omission is no doubt due to a lack of data, in particular of data concerning the elasticity of demand in the main consuming countries. However, for one commodity, sugar, this deficiency has to a large extent been remedied by two recent studies.' With the aid of these studies this article seeks first to give some idea of the extent of protection in the world sugar industry in a selected year, 1959, and then to answer the question: What would the effect on world consumption and trade have been in 1959 if all sugar had been available for consumption at world free-market price levels for raw sugar, allowing for refining and distribution costs ? In particular, the article is concerned with the effect of protection on trade in the world free market. All the calculations are of necessity rough, but are believed to be not so inaccurate as to invalidate the main findings. We begin with a brief account of the pattern and extent of trade and protection. Between one-quarter and one-third of world centrifugal (high-grade) sugar production has been traded internationally in recent years. But less than half this trade has taken place on an open or free market. The remainder has been traded under preferential marketing arrangements-under the British Commonwealth Sugar Agreement or the United States Sugar Act-or has been traded between France, Portugal and the Netherlands and their respective overseas territories, or within the Soviet Bloc. The free market has been very much a residual market, as it still is: just as there are few countries which draw their entire sugar supplies from the free market, so there are few countries whose sugar producers rely on the free market as the sole determinant of their gross proceeds.

Determinants of the Increase in the Cost of Living in the United States

controls, has found many advocates. The idea of employing OPA methods of price control without rationing would be patently stupid. The establishment of maximum prices which are below free market prices and not coupled with official rationing would create a strong excess demand and would force distribution of the goods to be accomplished through private rationing techniques of retailers favoritism or through first-come-first-served techniques standing in lines or through secret price premiums black markets. Hence, rationing by the government would have to be introduced in order to permit an orderly distribution of the commodities, which would all be scarce at prices fixed below the free market level. In peacetime, without the strong feeling of urgency in the striving for a universally accepted goal, such a system would provide increased incentives to consume the goods, reduced incentives to produce them, increased incentives to break the law, increased incentives to enforce red tape, increased incentives to use arbitrary power and restrict individual freedoms. It would be a disequilibrium system, making shortages and excess demand a chronic condition, without hope for correction and with increasing difficulties of enforcement. It is not intended here to oppose rationing of anything under any circumstances. One may make a plausible argument for resorting even in peacetime to direct controls for a few selected things under very specific circumstances; to wit, (i) if the object of control is a necessity (such as bread, not meat), (2) if the elasticity of its supply in the short run is practically zero, (3 ) if the elasticity of demand for it is very low, and (4) if it can be reasonably and safely expected that the will be over soon, for example, because demand at the controlled price will greatly decrease or supply greatly increase in the very near future. One may conceivably even argue, although less plausibly, for a general price reduction scheme with general rationing if there is evidence that the reduced prices will within a very brief time be the equilibrium prices owing to an imminent decline in demand or increase in supply. No sound argument, however, has thus far been presented to justify direct controls to enforce a general roll back of prices if neither a decline in demand nor an increase in supply is in sight. From this point of view, the United States is not in an emergency expected to pass quickly. We cannot expect a drastic reduction in demand in the near future nor do we wish for it -and production is now at a rate as high as we can possibly maintain.