A city is considering whether or not it should create special tax district to encourage new business development within a four-square block area adjacent to its downtown area.

If the city creates the special tax district, it will collect fewer taxes from businesses that already reside in the district (due to a uniform reduction in property taxes for businesses in the district). This amount is estimated to be $1,100,000 annually. If the city creates the district, two things might happen. First, there is a 60% chance of a large increase in business development. With such development, the new businesses will generate additional property tax revenues of $2,300,000 annually. However, the new businesses also will result in additional demands for city services in the amounts of $180,000 (police, fire, water & sewer, roads) annually. Second, there is a 40% chance of a modest increase in business development. This development would be less and would generate only $850,000 annually in additional property tax; additional city services would cost only $90,000 annually If the city does not create the special tax district, there is an 90% chance of no increased business development. There is a 10% chance for a modest increase in business development, with effects similar to those mentioned above.

1) __________ What is the net benefit (i.e., benefits-costs) if the city creates the special tax district and there is a large increase in business development?

2) __________ What is the net benefit if the city creates the special tax district and there is a modest increase in business development?

3) __________ What is the net benefit if the city does not create the special tax district and there is no increase in business development?

4) __________ What is the net benefit if the city does not create the special tax district and there is a modest increase in business development?

5) _________ What is the expected value of a decision to create the special tax district?

6) __________ What is the expected value of a decision not to create the special tax district?

7) _______ Should the city create the special tax district? Yes or No?