UNIVERSITY OF WATERLOO Department of Economics ECON 241 Introduction to Public Economics Fall Term 2020 Assign ment #2 Bac round for uestions 1 5. In the first portion of this assignment, you are tasked with estimating the positive I negative externality of living in Waterloo, Ontario compared to Kitchener, Ontario as measured through real estate prices. In order to accomplish this, we have collected data on listed prices of 30 houses in Waterloo and 30 houses in Kitchener. The data were collected from www.realtor.ca. We have collected the associated data on these 60 homes for the following standard explanatory variables in the housing market: I Square footage I Lot size I ll of bedrooms I ll of bathrooms I Age of the home The Waterloo variable takes the value of 1 for all houses in Waterloo {30} and the value of 0 for all houses in Kitchener (30). All of our data are given in the file named \"Kitchener_Waterloo\" posted on LEARN. Our model takes the form; Listed Price: = 30 + [31 Waterloo + E B Other Variables + a: where "i" refers to the ilh observation Your econometrician (me) has supressed the constant, Ba, when he estimated the regression. Effectively, forcing a property with no features to have a value of zero...makes sense. Your coefficient estimate of B1 is what you are primarily interested in since it measures the price differential of an average house in Waterloo relative to Kitchener, controlling for everything else (your other explanatory variables). Econometrician's Report: CONSTANT 0 N/A N/A N/A Square Footage $243. 8385165 30. 65467519 7. 954 517. 45807031 _. 710005251 4. 706 Bathrooms 56,0 30.0 74169 25 628. 4966 2. 353 0-356 Variable Analysis: The coefficient estimates for the explanatory variables are statistically significant {at the 5% level) with the exception of Bedrooms and Age of Home. Waterloo: The interpretation of this variable is that a home in Waterloo is $70,310.72 more expensive than a home in Kitchener, holding all other variables constant. For example, if I took my home in Kitchener and move it to Waterloo {unchanged in every way) then my home would be worth $70,310.72 more. Square footage: The interpretation of this variable is that a home with one extra square foot of space is $243.84 more expensive, holding all other variables constant. For example, if I added a 100 square foot sunroom to my home then my home would be worth $24,383.85 more. Lot Size: The interpretation of this variable is that a home with one extra square foot of property space is $17.46 more expensive, holding all other variables constant. For example, if I purchased a 100 square foot plot of land at the rear of my home then my home would be worth $1,745.81 more. Bedrooms: The interpretation of this variable is that a home with one extra bedroom is $19,026.78 less expensive, holding all other variables constant. This variable is not statistically signicant, which means that it does not differ significantly from zero in our regression. Therefore, we cannot attach any meaningful analysis to either the sign or magnitude of this variable. Bathrooms: The interpretation of this variable is that a home with one extra bathroom is $60,300.74 more expensive, holding all other variables constant. For example, if I added a bathroom to my home then my home would be worth $60,300.74 more. Age of Home: The interpretation of this variable is that a home that is one year older is $297.26 more expensive, holding all other variables constant. This variable is not statistically signicant, which means that it does not differ signicantly from zero in our regression. Therefore, we cannot attach any meaningful analysis to either the sign or magnitude of this variable. Quality of the Regression: Our regression has a high predictive capability. We can see this by examining the Adjusted R2 measure of 0960480462. This measure implies that after accounting for degrees of freedom in the regression our explanatory variables account for 96.05% of the variations in the price of homes in Kitchener- Waterloo. Public Features and Amenities of the Jurisdictions: The RT {residential tax rate) for Kitchener is 0.01129748 per dollar of assessed value of the property. For example, a home assessed at $400,000 would pay $4,518.99 in property taxes. The RT {residential tax rate} for Waterloo is 0.01107847 per dollar of assessed value of the property. For example, a home assessed at $400,000 would pay $4,431.39 in property taxes. Waterloo boasts 7 major public parks, many neighbourhood parks, and a major conservation area. Kitchener advertises 3 major public parks, and many neighbourhood parks. Together, Kitchener- Waterloo offers over 125 km of community trails. Waterloo does not have a major hospital. Waterloo houses 2 major Canadian universities. Kitchener boasts 2 major hospitals. Kitchener does not have a major Canadian university. For the purposes of any objective comparison of public services, we will assume that garbage collection, snow removal, etc. is provided at an equal quality and rate throughout the region. Waterloo has one 18 hole public golf course. Kitchener has 2full (18 hole) public golf course and a 9 hole public golf course. Waterloo has 0 homeless shelter services. Downtown Waterloo {North 8} has had 37 arrests in the recent period from January 2017 June 2018. Kitchener has 4 homeless shelter services. Downtown Kitchener {Central 1} has had 1754 arrests in the recent period from January 2017 June 2018. The average household income in Waterloo is $100,800. The average household income in Kitchener is $80,400. The average single-detached home in Waterloo as of April 2017 was $63 5,571. The average single-detached home in Kitchener as of April 2017 was $553,740. QUESTION 1 [2.5 Points]: Do any of the facts presented in the econometrics report seem to contradict your hypothesis about how a home is valued? Identify and comment on at least one variable from the regression analysis that did not conform to your hypothesis of how a home is valued. QUESTION 2 [2.5 Points]: Do any of the facts presented in the publicfeatures and amenities report surprise you? Identify and comment on at least one public good and amenity from the report that did not conform to your perceptions of Kitchener vs. Waterloo. QUESTION 3 [5 Points]: What factors might lead us to believe that there are fiscal benefits to living in Kitchener as opposed to Waterloo? Describe the type of citizens that choose to live in Kitchener (based on their optimal package of public goods and amenities}. QUESTION 4 [5 Points]: What factors might lead us to believe that there are fiscal benefits to living in Waterloo as opposed to Kitchener? Describe the type of citizens that choose to live in Waterloo (based on their optimal package of public goods and amenities}. QUESTION 5 [15 Points]: a} According to the Tiebout model, does Kitchener or Waterloo have the net fiscal benefit? [5 points] b} Using the Tiebout model learned in class, describe the predicted migration pattern between Kitchener and Waterloo. Create a diagram to aid your written answer. [10 points] QUESTION 6 [5 Points]: Suppose we have the following information on benefits for three possible municipal projects that are heading to a vote: ----" soccer He'd \"" a} If logrolling is not allowed then which projects will be completed? {1 point} b} If logrolling is allowed then describe how vote trading can lead to only the "right\" projects being completed and the \"wrong\" projects not being completed? Justify your answer by describing the most likely vote trading scenario. {4 points) QUESTION 7 [5 Points]: "In the presence of institutional constraints, the Theory of Second Best tells us to perform the welfare maximization problem to solve the Pareto Optimal conditions and then apply the institutional constraints to the optimal solution.\" Is this statement true or false? If you answer true then justify your answer by constructing a single diagram of the first-best, second- best, and piecemeal solutions and describing how the statement applies to the Theory of Second Best. If you answer false then justify your answer by constructing a single diagram of the first-best, second- best, and piecemeal solutions and describing how the statement does not apply to the Theory of Second Best. QUESTION 8 [5 Points]: Suppose that Charlene has an income of $110,000 per year and that there is a 1 in 5 {20%) chance that she will get sick in a given year. Let's suppose that the cost of the illness (in terms of lost work time and medical bills} is $80,000 which leaves her with an income of only $30,000 in that particular year. Utility UHeaImy UP = UR $30,000 $88,000 $94,000 $110,000 Income a} What is the actuarially fair premium for Charlene's situation? b} Continue to assume the given information. Suppose that the figure above represents Charlene's utility over various income levels. What is Charlene willing to pay for insurance? c) Continue to assume the given information. We know that Charlene would buy actuarially fair insurance but if the insurance company applied a 20% loading fee would Charlene still purchase the health insurance? Suppose for part d) and e} that instead of the diagram above, Charlene behaved as in the diagram below: Utility 4 H UHealthy UE* = UR R S U sick $30,000 $92K $94K $110,000 Income d) We know that Charlene would buy actuarially fair insurance but if the insurance company applied a 20% loading fee would Charlene still purchase the health insurance? e) What is the key difference between Charlene's first graph and her second graph