Thursday, February 25, 2010

A Tax on College Tuition

At the end of 2009, the city of Pittsburgh (PA) was set to vote on setting a tax of 1% on college tuition for students who attend school in the city of Pittsburgh as a means of paying for retirement benefits for retired city employees.

In Prin. of Micro, one of the things we examine is the elasticity of demand for college, and find that it is price inelastic, and one of the reasons that college tuition prices have a tendency to increase as opposed to decrease. We additionally find out that the side of the market (demand or supply) that has the highest relative inelasticity tends to bear the majority of the burden of a tax and that the more inelastic the demand or supply curve the lower is the deadweight loss of a tax.

It seems that in terms of welfare, Pittsburgh has found a group that meets each of these requirements. While I am not advocating taxing very young and generally low income individuals, there is one other economic problem that I would like to mention.

Pittsburgh is not a monopoly in the college market, and college students who are contemplating where to go to college might be price inelastic after they start college, but this may not be the case before they go to college. It will be interesting to see if this tax goes into effect, how potential college students make their college choice given the tax versus choosing to attend other colleges in cities without the tax.

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