Suppose that there are two adjacent jurisdictions, Yeroc and Erehwon. Suppose th

Question

Suppose that there are two adjacent jurisdictions, Yeroc and Erehwon. Suppose that everything else is equal between the two jurisdictions except that Yeroc has some net fiscal benefits (NFBs) over Erehwon. Based on Tiebout’s theory, we can predict that:

(a)There will be too much migration into Yeroc and equilibrium wages will fall in Yeroc and rise in Erehwon.

(b)There will be too much migration into Yeroc and equilibrium wages will fall in both jurisdictions.

(c)There will be too much migration into Yeroc and equilibrium wages will increase in both jurisdictions.

(d)There will be too much migration into Yeroc and equilibrium wages will increase in Yeroc and fall in Erehwon.

Explanation / Answer

Tibeout theory is based on the migration rate. It is a seminal paper. Fiscal benefits are tax measures that reduce the amount of taxes payable in order to benefit activities having a recognised public social or cultural interest as well as promoting the Nation's economic development.

a is the correct option.

Due to fiscal benefit, there will be labor migration to Yeroc and thus, the labor supply will rise in Yeroc and it will eventually lower the wage there. On the contrary, in Erehwon, there is less labor supply and thus the wage will rise.

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