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Interestingly enough, if you go back to Adam Smith and The Wealth of Nations and try to figure out why Adam Smith supported government provision of some public goods, you'll find that his reasoning was very similar to yours. In particular, he pointed to the hold up problem, something that's almost forgotten in much of contemporary public finance.

Frances: that's interesting. (It seems that everything's somewhere in TWoN). The hold-up problem seems, in principle, amenable to game-theoretic analysis. Without the hold-up problem, it does seem to me that most "public goods" could be provided privately, by negotiation between the beneficiaries.

"The first question is why did we need the government to do it? Why didn't we just hire the contractor ourselves?"

I gather that this discussion simply takes it for granted that if you tried to pave a city road on your own without getting the municipality involved, that you'd get sanctioned (presumably, fined)?

Not that this point changes anything you said, but it's worth mentioning.

Adam: Since the municipality owns the road, we would have needed their permission. But I think they would have given it. After all, they were prepared to pave it if we paid the cost. There's another question of what it does to the municipalities future costs of maintaining the road. My guess is that it reduces it slightly. Gravel roads (especially ours, with a clay base) needed a lot of ploughing to smooth out potholes whenever it rained. But I did ignore all this, to keep the story simple.

If you might move within 15 years, take it on the tax bill. My guess is that buyers will look at the tax amount, determine whether or not they can afford it, and may not even realise that there's a surcharge that other similar properties might not have. The tax surcharge is not likely to be something that even a real estate agent would think to factor in when looking for comparables.

Neill: Dunno. When I was shopping for this house, all the real estate agents' one-page flyers showing the key details for each house always listed the property taxes right next to the asking price. Also, I remember reading about cases in England, just after they brought in the new market value taxes in the 1980's, where people appealed their tax assessments demanding to be placed in the higher tax band. Though that might be one of those "man bites dog" stories; the fact that it gets reported in the newspapers means it almost never happens.

What Renovations Will Yield The Highest Return When I Sell?

Kitchen and bathrooms usually are the top of most cost recovery lists, as they are on this one. I think if you were to get the full list, cost recovery for a paved road is probably right at the bottom, just below delivery of a large boulder in your front yard. So, I'd say load it on the taxes.

Now, in Adam Smith's day, you could probably take the cobblestones with you...

Dang! And I paid $5,000 for that large boulder, as a "conversation piece"!

I'm surprised that any home renovation would recover 100%. Since the new buyer could always do exactly the same renovation himself, if he wanted. Essentially, when you do a renovation you lose "the option value of doing nothing". But it's not so easy for an individual home buyer to get the road paved.

Sadly, with public infrastructure we're stuck with 3 unsatisfactory ways of doing things:

1) Have everything done by unionized public employees, who only work half the time they're paid for and have outrageously expensive pensions.
2) Go to public tender and have everything done by private firms, but you know that more than half of what you pay for goes for "business development", marketting and profits.
3) Do a PPP, which costs the most but the government can pretend it costs nothing.

I think some of the higher recoveries are compensation for the inconvenience factor- nothing like the taste of drywall dust on your morning cornflakes, or eating Micky D's for two months solid. It seems I've even seen references that home renos are one of the most stressful marriage busting activities one can undertake.

A timely and relevant blog post given my personal life. Several of my neighbours are seeking to have fences installed. I am living Coase first hand as well. There are a high number of households involved and the transaction costs are starting to creep up. I found Coase compelling as a student and I found myself thinking about it over the last few weeks. Too bad I was never very good at game theory.

Back on topic. On a personal finance note, I know we can't accurately predict this but do you have any expectations as to what inflation will do to your money and salary over the next 15 years? If you think it will have a serious effect on your purchasing power, you could be better off taking the 15 year option as that $585 in 2010 dollars will likely be worth less in terms of purchasing power in 15 years.

I know there are many, many variables to consider when thinking about personal finance (rate of return, transaction costs, inflation, taxes, etc). Anyway, I think inflation expectations are important consideration. I definitely do consider inflation in my personal finance decisions.

You left out of the calculation the likelyhood that the town could get it done cheaper.

They already have a tendering infrastructure, a good network of contractors, and oversight professionals on staff. Contractors will also look at them as a better payment risk, which will get built into the bid, plus the issue of getting future work.

I strongly suspect that these considerations utterly dominate the local purchase vs government purchase decision.

The municipality's planners should've built the development to encourage fewer mental health problems, less porky kids, less infrastructure (pavement) costs...

Pavement to unsustainable housing is hardly a public good; promotes future AGW and pandemics. $400000 would fund local gardens and canning workshops that would stave off both non-local droughts and crowded stores.

Adam M: "On a personal finance note, I know we can't accurately predict this but do you have any expectations as to what inflation will do to your money and salary over the next 15 years? If you think it will have a serious effect on your purchasing power, you could be better off taking the 15 year option as that $585 in 2010 dollars will likely be worth less in terms of purchasing power in 15 years."

My guess is for 2% inflation (I think the Bank of Canada won't change its target, and will likely hit its target).

But it really depends on what my other investment options are for the $6,050. If I were planning to buy a series of bonds with 1 to 15 years to maturity, at 5% interest, then it won't make any difference (except I don't get taxed on the returns if I "lend it to myself" by paying the municipality in a lump sum.

If I expected high inflation though, then as you say, I might buy real assets instead.

Nick: I agree with you. It all depends on what your current investment options are and whether you can sleep at night taking on risk that nets you more than 5%.

While I struggle with the idea that this would be an investment, since it derives no real money returns, I appreciate the need to keep costs low. Personally I would be inclined to treat this as a depreciating asset (like a car, fence, etc.) which would be consumed over time so, in my opinion, why pay the 5%? If you chose the payment option, you would reach $6050 in the first 10 years and for the next 5 years of payments which, in effect, would be unnecessary especially if you plan on living their beyond that.

So even though I wouldn't treat it as investment in the context you described, I think I still arrived at the same conclusion as you. Pay by lump-sum and you're ahead of the game financially.

Having looked at sales data with varied taxes and association dues and despite property differences that usually outweigh these, buyers generally do take this into account, at least limitedly. Some the reasons they may not is whether they may think this is one time or reoccurring amount even if not explicit, or whether they anticipate future charges even if not pending.

You have $6,000 to invest. You want something rock-solid conservative so you look at an attractive, low-risk corporate bond paying 5% semi-annual coupons that you can buy at face value. The bond matures in 15 years.

Yes? No? I would personally avoid such an instrument in the current macroeconomic environment given that I expect borrowing rates to steadily increase over the near-term. If borrowing rates, increase, the bond will decline in value and trade at a discount.

Let's think about paying the tax as a type of renovation investment. The stylized facts of returns on renovations are not encouraging. Apparently, the typical return is negative. Why? Perhaps because tastes in domiciles and attribute bundles are so idiosyncratic? Yet, according to my first-hand anecdotal evidence, many home owners who renovate sincerely hope to increase the market value of their home.

Are home shoppers fully Ricardian-Equivalent with respect to property taxes? My intuition suggests that is not the case. The great unwashed (including those with graduate degrees in so-called hard science) seem to have great deal of difficulty understanding taxes, and their incidence. So if we drop the implicit assumption of rational behaviour and assume some kind of other behaviour pattern, how will prospective buyers react to the lump sum tax being paid off or the option of let's say another 10 years of additional property-related extra tax payments?

Does the endowment effect pertain to paid up or outstanding tax obligations? I suspect that most ordinary tax-incidence challenged home shoppers would negatively view a future stream of extra tax payments. If that is the case, a marketing-wise seller would want to pay the taxes upfront.

Hey, no matter how you wish to finance it, or how you wish to discount it, if the retail value is zero, it doesn't really matter.

Then the q becomes - how to stick the next guy with as much of the cost as possible?

Again, I'd argue, put it on the taxes, and when they show the house- invite the kids in the cul-de-sac who normally play road hockey to the nearest Odeon theatre for a matinee show, and spend the saved money on a home "stager" who will place bags of potpourri strategically through your pantry to maximize NPV (or "karma" as they may call it)...etc,

"the right thing for me to do is to minimise the stress on the global financial system, so I should just pay the $6,050!"

Hilarious - only an economist would say this. I wholeheartedly agree with this sentiment. Given an option, I always try to pick the simpler option if the terms of the agreement are fairly neutral either way.

Nick Rowe,
Very interesting post.
In my own work regarding the public vs the private paradigm I have concluded that a public transaction of occurence or the publicity process has different dynamics than a private transaction of occurence or the privacy process. A public transaction orientation is engaged by civic units sharing common attributes/rights formed by symbiosis of parts of occurence or occurences in a community setting. They are triggered by the incentive of duty in solidarity among civic units and in cooperation among common attributes.Common attributes is the result of a mutual arrangement of symbiotic relationships.
A private transaction orientation is engaged by shelf units trading proprietary attributes/rights formed by osmosis of parts of occurence or occurences in a market setting. They are triggered by the incentive of interest in competition among shelf or private units and in synergy among proprietary attributes.Proprietary attributes is the result of a lateral arrangement of osmotic relationships.
Every transaction is the joint manifestation of privacy and publicity processes differing in relative intensity conditioned by the regime situation that favors either common or proprietary attributes/rights.

For example a transaction can be more of a work/reward process/feedback or a donation/grace process/feedback. The difference in dynamics shows that we must analyse transactions taking into consideration the relevant incentives and forces that operate upon the transaction.

20? 25?

Interesting you used the example of a road, since that's what Frank Knight argued against Pigou in "Some fallacies in the interpretation of social cost".

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