What is a market failure?

At Scioto Analysis, our core specialty is microeconomic analysis of public policies. We use this lens because microeconomics provides a framework for understanding how individuals, households, and firms make decisions in response to changing market conditions. 

At Scioto Analysis, our core specialty is microeconomic analysis of public policies. We use this lens because microeconomics provides a framework for understanding how individuals, households, and firms make decisions in response to changing market conditions. 

One of the most important models we use is basic supply and demand. How people react to changes in market prices can tell us a lot about underlying economic conditions. Understanding these markets is essential.

In a competitive market, the price of a good will eventually reach an equilibrium such that supply equals demand. Given the assumptions of a competitive market, this has the fortunate side effect of maximizing total surplus in the market. In other words, an intervention in the market will result in less overall value existing in the economy. 

Unfortunately, perfectly competitive markets don’t really exist in the real world. Because of this, it’s worth understanding what the gaps are between real markets and ideal markets. If we understand why markets aren’t working at maximum efficiency, then we can consider ways to address those issues and create more value for society. 

One of the most common and important market failures is the existence of externalities. An externality is some effect that occurs when a good is consumed or produced that affects third parties to a market transaction. Classic examples are pollution from a factory or secondhand smoke from cigarettes. 

If an externality is the only market failure, then that market actually does operate completely efficiently for the buyers and sellers who participate. The issue is that because people outside the market are harmed (or helped in some cases) by that market activity, overall wellbeing might actually increase if less of that good was consumed. The private equilibrium does not align with the social equilibrium.

Another important market failure is information asymmetry. This occurs when one side of the market has some private information that allows them to take advantage of the other. A common example of this is a shady used car dealer who intentionally hides defects in order to sell poor cars at high prices. 

A less nefarious example of imperfect information is if a market participant is unaware of viable substitutes. A buyer might not know that other sellers of a good might offer better prices or quality, or a seller might not know their product could fetch a higher price if they sold to other clients. 

Another significant market failure arises from public goods, which are defined by two key characteristics: they are non-rivalrous and non-excludable. Non-rivalrous means that one person's consumption of the good doesn’t prevent another person from consuming it. Non-excludable means it is impossible or very costly to prevent someone from consuming the good once it has been produced, even if they haven't paid for it.

One example of a public good is a city park. One person walking their dog through the park doesn’t prevent someone else from having a picnic, and it isn’t possible to keep people who don’t help pay for the park’s maintenance from enjoying the greenspace.

Because of these characteristics, public goods are often underprovided by the private market. This is due to the "free-rider problem," where individuals can benefit from the good without paying for it. A private company would struggle to make a profit providing public parks because they can’t reasonably make people pay. As a result, the government typically steps in to provide public goods, funding them through taxes.

One final important market failure is the existence of monopolies. In economic theory, monopolistic firms have the ability to extract greater surplus for themselves at the expense of lower surplus for consumers plus an additional deadweight loss. In other words, they take an extra slice of the pie at the cost of throwing the rest in the garbage. 

Because of this, monopolies are generally illegal. However, there are cases where it actually makes sense to allow firms to have monopoly power. These are called natural monopolies, and they occur when the upfront costs of entering a market as a seller are extremely high or where there are significant economies of scale. 

The most common example is local utility providers. It would be extremely expensive for more than one company to build a major power plant and transmission infrastructure, so in many places single firms are allowed to manage all the utilities. Where I live in St. Paul, Minnesota, we have Xcel Energy. These firms need to be closely regulated since they don’t have natural competitors to encourage them to act in a socially optimal way.  

Market failure is a key consideration for policy analysts like us. They give us guidance for where government can improve markets through tools like taxes, subsidies, public goods provision, and regulation. This provides us with a roadmap for how government and markets can work together to improve social welfare as a whole.

What is Pigouvian Taxation?

This summer, my favorite podcast Planet Money is doing its most recent version of an “economics 101” series they have done the past couple of years called Planet Money Summer School.

First, if you don’t listen to Planet Money, start. It is the best public policy podcast out there, and it isn’t even a public policy podcast. The podcast started as a National Public Radio show in the wake of the Great Recession. The idea: talk about economics…in a way that isn’t completely boring. In this way, Planet Money is trying to do the same thing Scioto Analysis is–though they are admittedly a little better at it than we are.

Why I call Planet Money the best public policy podcast out there is that they are constantly talking about the public policy implications of topics they cover. I don’t think this is necessarily something the reporters on the show set out to do initially, but I think it’s a natural outgrowth of reporting on the economy. It is impossible to cover the economy without covering how the public sector interacts with it. As much as people want to paint the U.S. economy as a privatized economy, the economy is decidedly mixed, with the public sector intervening in private markets through regulations, subsidies, taxes, enforcing property rights, certification, and a number of other avenues.

This summer’s Planet Money Summer School is focused specifically on this topic: how government interacts with the economy. This has made it a bit of a crash course in public policy analysis, especially given that economics is our main framework for conducting public policy analysis.

I was surprised about this when I first enrolled in graduate school. I do not know exactly what I was expecting when I first enrolled in the University of California, Berkeley’s Graduate School of Public Policy, but two courses of microeconomics was not exactly what I thought I would encounter. I found myself confused by why we spent so much time on economics and not much time on philosophy and political economy.

Ultimately, I came around to it. Aaron Wildavsky, the original founder of Berkeley’s public policy school, settled on a curriculum of microeconomics and statistics when starting the school, figuring an education in accounting and management would be too redundant with education students would learn on the job and that an education in political economy and philosophy would be too abstract to be useful to aspiring analysts. Microeconomics and statistics allowed analysts to construct models that could be used to understand how public policies work and what they do to the economy and, by proxy, people’s lives.

This Planet Money Summer School has been a great reminder of this to me. The episode I listened to the other day was on taxes. The episode was over 37 minutes long–quite long for a Planet Money episode. But this topic is so important. In the United States, one in every four dollars in the economy is collected in taxes, filtering through the public sector. The way these taxes are designed has a significant impact on the economy as a whole.

One segment of the story made my ears perk in particular: the segment covering Pigouvian taxes. Pigouvian taxes are taxes named after Early 20th-Century Economist Arthur Pigou, a father of welfare economics. He developed a theory of market failure that undergirds many public policy and public sector economics, the theory of externalities.

The main thrust of the theory of externalities is that there are certain economic transactions that happen where the consumer and the producer are not the only parties affected by the transaction. If someone purchases electricity from a coal-fired power plant, the consumer pays the producer for energy. This means the consumer gets energy and the producer gets money. Children who play in the park downwind from the power plant get the nitrous oxide and particulate matter emissions from the plant in their lungs.

From an economic standpoint, this means that the social costs of the transaction exceed the private costs. So while markets are efficient systems for allocating resources when goods are purely private, when trade in goods generate these external costs (“externalities”), social costs exceed private costs, incentivizing producers to overproduce and consumers to overconsume the good due to costs being unloaded on third parties.

Pigou had a theory for how to fix this problem: tax goods that have negative externalities. This tax then brings the private cost in line with the public cost, making the market efficient, and generating revenue for the public sector as a bonus.

This theory has gone on to be incredibly influential in public policy over the past century, being the major theory undergirding carbon taxes, providing a framework for taxing secondhand smoke and the external costs of alcohol, and inspiring contemporary policies like Manhattan’s new congestion fee. These are all forms of Pigouvian taxation.

What I found most compelling about this Planet Money episode, though, was the suggestion for a Pigouvian tax put forth by guest Derrick Hamilton.

I first came across Derrick Hamilton when he came to my home of Columbus, Ohio to serve as the director of the Kirwan Institute, a data and racial equity institute at Ohio State University. At the time, he was talking about baby bonds, the idea that the public sector should put a certain number of dollars toward every new child that then grows in value until they are awarded it at age 18.

During the Planet Money episode, he was asked what Pigouvian tax he would want to put in place. His answer? Junk mail. You get mail sent straight to your home that (1) is not good for the environment, and (2) requires you to go through the work of sorting and throwing away. Both of these are external costs incurred by society not currently captured by junk mail.

I hate junk mail. I hate that we have advanced to the point where we can do most of our mail communication electronically and yet I still have a chore I have to do daily of throwing away unwanted solicitations in my mail. This seems like a fair use of our tax system, and a smart one, too. Why not give us our time back, save the environment, and raise more public funds to boot?

Pigouvian taxation is an incredible tool. I would love to see it unleashed on one of my worst enemies: unwanted paper in my mailbox. Can you think of a new Pigouvian tax we could put in place?

New California Poverty Measure statistics show what poverty is like in the Golden State

Last week, my colleague Rob Moore wrote about relative poverty measures and how we might benefit from changing the way we calculate poverty. At Scioto Analysis, we calculate our Ohio Poverty Measure, a version of a relative poverty measure focused on the state of Ohio. We conduct this as a part of our social bottom line work, updating it when we can find time between client projects.

Our project was based on work done in other places such as Wisconsin, New York City, and California. The main difference between these reports and the Supplemental Poverty Measure is that these measures use American Community Survey data rather than Current Population Survey data. 

The American Community Survey is much larger than the Current Population Survey, but it doesn’t have as much detail. This means that researchers get the additional geographic resolution needed in order to construct these more local poverty measures, but they need to create models to estimate some of the information that is not included in the American Community Survey. 

Recently, the updated data for the California Poverty Measure was released. I wanted to highlight some of the takeaways from this report to help demonstrate why it’s important to have such local poverty data.

In 2023, 9.8% of working Californians between ages 25 and 64 (about 1.5 million people) were living in poverty. The California Poverty Measure poverty threshold for that year averaged $43,990 for a family of four, but varied widely depending on location.

About half of all working adults in poverty were employed full-time for the whole year, and their poverty rate was 6.7%. For those working part-time all year, the rate shot up to 23.6%, and for those working only part of the year, 18.4%. The expiration of pandemic-era supports contributed to a 1.1 percentage point increase in the worker poverty rate from 2022.

An additional 2.3 million people were near poverty, with incomes between 100% and 150% of the poverty line. Certain industries and occupations had especially high poverty rates. Agriculture and service sectors like administrative services, leisure and hospitality, and other services all saw rates above 18%. Among occupations, fishing, farming, forestry, and building maintenance topped the list, with one in four workers in poverty.

Geography matters, too. Southern coastal California had some of the highest poverty rates for working adults, with Los Angeles County at 12% and Orange County at 11.3%. Regions like the Sacramento area and Northern California had much lower rates, around 6.6%. In high-cost regions, even full-time employment was not always enough to escape poverty, pointing to the interplay of wages, expenses, and safety net accessibility. These geographic insights are unique among these types of poverty measures.

Family structure also shapes poverty risks. Most poor working adults live with other adults, often with children. Poverty is particularly acute for single parents without other adults in the household, nearly one in four are in poverty. For single adults without children, the rate is lower but still significant.

The California Poverty Measure shows that earnings account for about 80% of poor workers’ resources. These are supplemented by programs like the Earned Income Tax Credit and CalFresh. Without these supports, another 4% of workers would fall into poverty.

For policymakers, these findings demonstrate that higher wages, more hours, and career advancement are important but not sufficient on their own. Access to child and elder care, healthcare, and education and training all play a role in whether work leads to economic security.

We plan on updating our own Ohio Poverty Measure sometime in the near future. Hopefully we will one day have the capacity to make regular updates so we can get these types of insights in real time for Ohio. 

Ohio lawmakers could focus on increasing incomes instead of minor, ineffective property tax changes

On July, Republican lawmakers in the Ohio House of Representatives voted to overturn Republican Gov. Mike DeWine’s veto of a line in the state budget that would ban certain types of levies from being put on the ballot by local governments or school districts.

The reason House members thought this was so important that they needed to get together and have this vote even when their chamber was closed for renovation was because they saw this as a way to reduce the burden of property taxes.

In the wake of COVID-19, global supply chain disruption, a contraction of building materials, and changes in demographics caused substantial shifts in housing supply.

Many in Ohio have seen the value of their home increase precipitously in the years since 2020, especially in 2022-2024.

With three-year valuations coming in, many were hit with sticker shock of their new property taxes, and state lawmakers leapt into their fighting stances, ready to find a way to reduce the impact of property taxes on households.

The Ohio General Assembly commissioned a committee to study ways to reduce the burden of property taxes. This led to a series of provisions in the new state budget trying to reduce the burden of property taxes in the state.

The provision that was vetoed and the focus of the Ohio House override is focused on a specific type of levy: an emergency or replacement levy.

This is still a levy that has to go before voters, the same way any other property tax levy does.

The argument made by House members on the floor was that by banning the use of the phrase “emergency” or “replacement,” voters would not be “tricked” into voting for property taxes they didn’t believe in.

So basically, the diagnosis here is that property taxes are so burdensome, at least partially, because people mistakenly vote for them.

Ultimately, these sorts of policy changes to the property tax system will do little to reduce the burden of property taxes.

Yes, legislators can now go to their constituents and say “Hey, I went out there and voted even as the House chamber was under renovation to deliver property tax relief to you.”

But these are small administrative changes to the types of property taxes that are being put before voters. They will do little to reduce the burden of property taxes.

It is worth asking the bigger question: are property taxes really the problem residents of Ohio are struggling with?

Or is the real problem that property taxes grew in a short period of time relative to incomes?

Because that is unlikely to happen again soon with interest rates high and the global supply chain for building materials at a new equilibrium.

There is good reason to believe that legislators are stuck fighting the last war around property taxes.

So what can policymakers do?

They can improve upon the system by moving from a property tax to a land value tax, which falls less heavily on low-income renters and does not penalize people for developing their land.

They can invest in programs like early childhood and K-12 education which improve incomes in the long-run or the earned income tax credit and child tax credit which would improve incomes in the short-run.

Or they can keep beating around the bush, making small changes to the property tax system that do little more than to complicate an already-complicated system.

Is it time to embrace relative poverty measures?

In 2019, Ajit Banerjee and Annie Duflo won the Nobel Prize in Economics. They won the prize for their work on poverty across the world, using rigorous experimental methods to understand the nature of poverty in some of the world’s poorest regions. 

In their 2011 book Poor Economics, Banerjee and Duflo share the results of an experiment to learn about the relationship between poverty and hunger. In this study, they went to people with the lowest of low incomes and asked them about calorie intake. They tracked what people were eating and how many calories they were consuming in their state of extreme poverty.

Their theory was this: if people with few resources have low caloric intake, they will increase their caloric intake as they receive money. So they tested it, giving people money and seeing how their caloric intake changed as they received this money.

A strange thing happened. Among people who received money, their caloric intake decreased when they received it. So people who had the least money in the world, given the chance to increase their caloric intake, actually decreased their intake of calories.

Well why was this? It turned out that people who were living with the lowest amount of resources in the world decided to change their diets when they received cash payments. Instead of just eating rice and lentils, they started to eat a meal or two a week of meat or fish. These meals have much lower calories per dollar than meals of just rice and lentils, but these low-income people preferred to have a little variety in their meals, even if it meant sacrificing calories.

This is one reason, among many, that the current Official Poverty Measure seems to be out of whack with our conceptualization of poverty in America. The Official Poverty Measure was developed by Mollie Orshansky, an economist working in the Social Security Administration during the Johnson Administration. At the time, the average American family spent about one-third of their income on food. For this reason, Orshansky believed an adequate income would be the cost of a thrifty food plan times three. The federal government agreed with her and it was adopted as the poverty threshold.

We still use this threshold as our measure for poverty today, adjusted for changes in cost of living each year by the Department of Health and Human Services. There are some problems with this measure, though. First, families spend much less on food today than they did sixty years ago because food costs much less. On the other side, families spend much more on health care and housing, which relatively cost more than they did sixty years ago. The official poverty measure also does not have adjustments for cost of living, so a household of four in rural Oklahoma has the same federal poverty measure threshold for poverty of about $32,000 as a family of four living in a flat in San Francisco.

More fundamental than these problems of changes over time, though, is this assumption that people below the federal poverty line will starve. Yes, food insecurity exists in the United States, but starvation is nearly nonexistent in the country. The reality of the poverty line is that we are not trying to define how much is needed to literally survive. There are plenty of people who live for years under the federal poverty line. What we are trying to define is how much is needed to live a dignified life.

The allure of a measure based on food intake is that it gives us a veneer of scientific reasoning. We look at Maslow’s hierarchy of needs (which I could write a whole other blog post on) and our eyes go straight to the foundation: we need food to survive. So let us calculate the cost of food and use that as a basis for this idea of what income people need to not die.

What Banerjee and Duflo show us is how much of a sham this approach is. We’re not getting any closer to a “survival” estimate by saying how much it costs to buy a thrifty meal plan. Even during Orshansky’s time, the federal poverty measure did not capture what we meant by “poverty.”

An alternate poverty measure that gets closer to the concept we really have when we talk about poverty is the Supplemental Poverty Measure. The Supplemental Poverty Measure is an improvement on the Official Poverty Measure that makes adjustments for geography and estimates the impact of public benefits and taxes on poverty rates. Most importantly, it pegs the threshold to average spending levels, implying that poverty is defined by the inability to spend within a range of average spending in the country.

This is what we mean when we’re talking about poverty: does your ability to provide goods for yourself and your family fall far outside of the norms for your community? In our Ohio Poverty Measure, we make a similar estimate based on American Community Survey data, getting geographic precision that becomes even smaller than counties in populated parts of the state.

This line of reasoning, though, makes me even more interested in purely relative measures of poverty. A common measure of poverty, and the measure that is used by the Organization for Economic Co-operation and Development (OECD), is 50% of the median income. One thing I find attractive about the measure of 50% of the median income as the poverty measure is that it is incredibly easy to estimate anywhere. If you know what the median household income is for an area, all you need to do is divide it by two, then compare someone’s income to that. Then you know if they are in poverty or not.

Poverty will always be a contested concept. There are certain researchers at think tanks like the American Enterprise Institute who argue that poverty has almost completely disappeared in the United States, arguing that people consume so much more than they did during the Johnson era and that should be our measure for poverty. There are others who add up a list of items they believe make up household essentials and say if you can’t pay for these at market rates, then you are in poverty. These measures put the poverty rate at as high as half the U.S. population. 

Both of these definitions strain the definition of “poverty,” giving us answers to the question of who is in poverty that do not fit with our intuitions about what defines poverty. Ultimately, poverty is a socially-defined term. Having it connected to society through a relative measure is the most rigorous way to define poverty in line with the reality of how people see it in their communities.

What is the Community Eligibility Provision for school meals?

In the past decade, a new federal program has reshaped how over 27 million children across the country receive school meals. The Community Eligibility Provision allows schools with a large number of low-income students to serve free meals to all students, as an alternative to the traditional free and reduced-price meal system in the National School Lunch Program and School Breakfast Program. The federal government established the Community Eligibility Provision as part of the Healthy, Hunger-Free Kids Act of 2010, and the program became available nationwide beginning in the 2014-2015 school year. 

The Community Eligibility Provision has been a topic of hot debate. Advocates argue that the Community Eligibility Provision makes school meals more accessible and less stigmatizing for students in need, reduces schools’ administrative costs compared to the traditional school meals system, and improves students’ academic and health outcomes. These claims are generally supported by research, although the body of evidence is still relatively small since the Community Eligibility Provision is so new.

Critics, however, contend that the Community Eligibility Provision is an inefficient use of tax dollars, noting that some students in schools that participate in the Community Eligibility Provision come from higher-income families and do not need free meals. The Heritage Foundation’s Project 2025 agenda suggested that Congress should eliminate the Community Eligibility Provision and “restore [the National School Lunch Program] and [School Breakfast Program] to their original goal of providing food to K–12 students who otherwise would not have food to eat while at school.” Earlier this year, federal lawmakers considered reducing eligibility for the Community Eligibility Provision, but as of July 2025, that change has not been implemented.

The number of Ohio students whose schools participate in the Community Eligibility Provision has increased substantially since the program began. In 2015, 19% of Ohio students were in schools that participated in the Community Eligibility Provision. By October 2024, the number had risen to 40%, or 684,000 students across the state. The rise in participation is likely due to a combination of expanded eligibility, new methods for certification, and increased interest in providing free school meals to all students after the USDA temporarily provided universal free school meals nationwide during the Covid-19 pandemic.

Schools can apply for the Community Eligibility Provision individually or as part of a group through a Local Education Agency, such as a school district or charter school organization. For simplicity, I will refer to Local Education Agencies as “districts.” To be eligible to participate in the Community Eligibility Provision, at least 25% of the enrolled students must be “identified” with certain criteria. An “identified student” is any student who is automatically certified to receive free school meals due to household participation in other social safety net programs, such as the Supplemental Nutrition Assistance Program (“food stamps”) or Temporary Assistance for Needy Families. The number of “identified” students may be lower than the total number of students eligible for free meals, since not all eligible families participate in the safety net programs that are used for automatic certification.

Enrolling in the Community Eligibility Provision does not guarantee that a school or district will receive enough federal funding to provide free meals to all students. The federal government reimburses schools for enough meals to serve 1.6 times the “identified student percentage,” meaning the percent of students who meet the automated eligibility criteria described above. Thus, in order to receive federal reimbursement that covers free meals for all students, a school or district’s identified student percentage must be at least 62.5% (since 62.5% x 1.6 = 100%). Multiplying the identified student percentage by 1.6 helps provide coverage for low-income students who are not automatically identified through other safety net programs. 

If a school or district’s identified student percentage is less than 62.5%, they may need to supplement with local or state funding to provide free meals to all students. 51% of Ohio schools that participate in the Community Eligibility Provision have an identified student percentage greater than or equal to this threshold, although this statistic does not necessarily indicate whether the schools receive enough federal reimbursement to cover all students, since eligibility and reimbursement rates are often determined at the district level.

The plot below displays the distribution of identified student percentages across Ohio schools that participate in the Community Eligibility Provision. The median identified student percentage across schools is 62.9%. Some schools have identified student percentages lower than the 25% eligibility threshold, because they are enrolled in the Community Eligibility Provision at the district level and have a lower poverty rate than the other schools in their district. For example, the Columbus Gifted Academy has an identified student percentage of only 1.6%, but is enrolled in the Community Eligibility Provision because it is part of the high-poverty Columbus City Schools district. As noted above, the total number of low-income students is typically higher than the number of “identified” students.

Distribution of “Identified Student Percentages” Across Ohio Schools Participating in the Community Eligibility Provision

Plot generated with data from the Ohio Department of Education and Workforce; code available here.  

Beyond the Community Eligibility Provision, the State of Ohio has also expanded access to free school meals using state funding. Since 2023, Ohio reimburses schools to provide free meals to students who are federally eligible for reduced-price meals. In the 2025 legislative session, the Ohio Senate considered a bill to expand access to free school meals to all Ohio students, but the bill did not pass. Universal free school meals remain a topic of national conversation, so we may see other changes proposed in the near future.

For more on school meals, see our work on the history of school meals, school meals and student achievement, and universalfree school meals.

Ohio economists agree Medicaid cuts will have impacts beyond healthcare loss

In a survey released this morning by Scioto Analysis, 19 of 20 economists agreed that reducing Medicaid spending in Ohio by $37 billion over the next ten years will have significant economic ramifications in the state beyond loss of health insurance for current Medicaid recipients. This comes after the passage of HR1, the “Big Beautiful Bill Act.” KFF estimates that this bill will result in about $37 billion less being spent on Medicaid in Ohio.

Many respondents specifically identified the potential labor market impacts that cutting Medicaid spending could have. “Denying health care may reduce the supply of labor.  If people are unhealthy, they will not be able to work,” wrote Charles Kroncke of Mount Saint Joseph university. Bob Gitter of Ohio Wesleyan similarly noted “More sick time, potential job losses due to missed time at work, and potential closing of rural hospitals.”

Despite this, the 12 of 20 economists did not believe that these cuts would cause a severe recession in Ohio. “$37 billion over 10 years or $3.7 per year is about a third of a percent of Ohio's annual GDP, unlikely to create a recession, especially a big one. However, it could contribute to a recession caused by something more major,” wrote Christian Imboden of Bowling Green University. 

One economist who believed this would lead to a recession was Iryna Topolyn from the University of Cincinnati, writing “I am not certain about the severity of recession, but I am fairly confident that this cut will spur recession. The direct effect of reduced spending on medical services, amplified by the multiplier effect, will be observed in the short-run. Moreover, there will be economic loss due to sick days as a result of poorer health. Additionally, in the long-run there will be a negative effect of deteriorating human capital due to worse health outcomes.”

The Ohio Economic Experts Panel is a panel of over 30 Ohio Economists from over 30 Ohio higher educational institutions conducted by Scioto Analysis. The goal of the Ohio Economic Experts Panel is to promote better policy outcomes by providing policymakers, policy influencers, and the public with the informed opinions of Ohio’s leading economists. Individual responses to all surveys can be found here.

What is a land value tax?

A big policy discussion recently in Ohio has been about property taxes. They have become such a contentious project that one advocacy group has been pushing to abolish them in Ohio.

A few months ago, my colleague Rob Moore wrote an commentary exploring some of the alternatives to property taxes that could be used to replace the missing revenue should property taxes be abolished. Today, I’d like to talk more in-depth about one of those alternatives: a land value tax.

As the name suggests, a land value tax differs from a property tax by raising revenue from the assessed value of the undeveloped land on each parcel as opposed to the total value of the development of that parcel. This means that two neighbors that have to pay different property taxes because of the differences between their houses would have to pay the same land value tax since their undeveloped plots are essentially identical.

Economists are generally enthusiastic about this idea because it solves a major problem that property taxes have: they disincentivize people from making improvements to their property. 

This is not such an issue in properties where the residents own the property since they can internalize all this information and make an optimal decision. However, this creates problems in rental properties where the owners have less of an incentive to improve the living conditions. 

Those of you who are familiar with property tax research are probably aware that renters actually bear a large portion of the burden of property taxes, but they don’t bear 100%. This means that if property taxes go up as a result of some improvement, then a landlord would not get the full marginal benefit of the increased rents they would receive. If instead there was a land value tax in place, then making those improvements would not change their tax bill at all, and the landlord would have an increased incentive to make those improvements. 

It is interesting to consider what would actually happen in practice if property taxes were replaced with land value taxes. Lets assume that we want to have a revenue neutral land value tax, that is we raise the same total revenue with both. 

Property values are almost always higher than land values, so the land value rate would need to be higher in order to make up the difference. The city of Altoona, PA implemented a land value tax in 2002, and they found that the total assessed value of their land was one-seventh the assessed value of all the property, so their land value tax rate was seven times higher than the property tax rate.

If the land value tax rate is seven times higher than the property tax rate, then in order to figure out what this would look like for individuals we just need to determine what the difference is between the assessed value of their land vs. their property.

If the property is exactly seven times as valuable as the land, then they would pay the same amount of taxes under each scenario. If someone’s property is highly developed and is worth more than seven times the amount of the undeveloped land, then that person would end up paying less in their final tax bill. Finally, if the property is undeveloped or underdeveloped, then it would incur a higher tax bill under a land value tax. 

This is particularly important when thinking about completely undeveloped land. Speculative real estate investors can purchase undeveloped land and wait until real estate prices go up before selling it at a higher price to someone who is actually interested in developing it. If they had to pay land value taxes instead, they would be faced with much higher taxes in the interim, which could lead to those properties only being purchased by people with plans to develop them in the first place. In an urban setting where there isn’t enough land to go around, a land value tax changes the incentive structure and makes it more worthwhile to improve the quality of developed structures. 

Housing is becoming an increasingly important problem for local governments across the country. Land value taxes won’t solve every single problem, but they could be a better alternative to property taxes in some areas.

What is Moving to Opportunity?

The neighborhood a person is born in has a significant impact on their life trajectory. According to Census Reporter and the Centers for Disease Control and Prevention, children born in the communities of Avondale and Belvidere outside of Canton, Ohio can expect to grow up to have a median income of $92,000 and an average lifespan of 82 years. By contrast, the neighborhoods five streets over, Meyers Lake and Lakeview Terrace, face much bleaker prospects: their kids can expect to make about 40% less and live seven fewer years than their neighbors just a 10 minute drive away. Neighborhood disadvantage alone can mean poorer health, higher poverty rates, and fewer opportunities.

The Moving to Opportunity program was a housing mobility experiment designed to test how relocating low-income families to higher-income neighborhoods would affect their social and economic outcomes. The underlying assumption of the study was that moving families into safer, higher opportunity neighborhoods could have positive effects on children’s future employment prospects, income, and social well-being. 

Launched in 1994 by the Department of Housing and Urban Development, the managers of Moving to Opportunity randomly selected 4,600 families from a pool of applicants. Participating families had to be living in public or Section 8 housing located in a “high-poverty” designated area in Boston, Baltimore, Chicago, Los Angeles, or New York City and have at least one child under age 18. 

One important part of Moving to Opportunity’s design is that it was an experiment, focused on trying to learn what would happen if people moved to low-poverty neighborhoods. Selected families were divided into three total groups: two treatment groups and a control group. The experimental group received a subsidized housing voucher and housing counseling which included help with housing search, landlord outreach, paperwork assistance, and other benefits. This offer was contingent on them moving to a neighborhood with a poverty rate below 10%. 

The second treatment group, the Section 8 Group, received an unrestricted Section 8 housing voucher with no further assistance. The control group remained in public housing in their original neighborhood. The experiment was designed to isolate the effects of the neighborhood environment - separate from housing assistance - to better understand which factors most improved outcomes for participants. 

A follow-up study by Raj Chetty and colleagues on Moving to Opportunity found encouraging results from the program. Children who moved at a young age experienced higher college enrollment, higher lifelong earnings, and reduced criminal activity among girls. The program informed a generation of housing research and inspired interest in mobility programs, including Ohio’s own Move to PROSPER.

Expanding the foundational concepts of Move to Opportunity, the Ohio State University partnered with local organizations and the Ohio Finance Agency to launch Move to PROSPER as a pilot program to explore the effects of housing mobility in Franklin County. Initially supporting ten single-mother households, the new program adopted Moving to Opportunity’s foundational elements and made several key expansions. 

Move to PROSPER expanded the Moving to Opportunity model to include ongoing programming on financial literacy, career advancement, and wellness coaching for the entire 36-month program duration. Providing this extra guidance was intended to help families adjust to their new surroundings and build stability and independence after the support concluded. 

The program also incorporated one of Moving to Opportunity’s key findings: children under 13 enjoyed nearly all of the long-term benefits of the original child participants. Move to PROSPER specifically selected households with young children to further explore the potential of early intervention. 

Evaluation of Move to PROSPER suggests the program has yielded positive outcomes for participants. When compared with families with similar socioeconomic backgrounds, Move to PROSPER’s participants experienced substantial increases to income, improvements in school engagement, improved mental and physical health, and strong neighborhood and program satisfaction.

Building on the success of Move to PROSPER, the newly-named Families Flourish emerged as a standalone non-profit in 2022, expanding the Move to PROSPER pilot’s core offerings to 64 families across four cohorts with the goal of expanding program access throughout Ohio. Program participants experienced mostly positive changes in mental health and economic standing, with consistently positive feedback.

Despite the promises of Moving to Opportunity and its Ohio-based adaptations, the economic mobility concept has faced criticism and produced mixed results. Adults in the original study did not see improvements in income or employment. Many families also relocated to high-poverty areas at the end of the program, and many selected families didn’t accept the relocation offer altogether. So whether the economic benefits of the program outweigh the economic costs is an open question.

In my current work with Scioto Analysis, I am evaluating the potential impact of expanding Move to Opportunity-inspired models, including Move to PROSPER and Families Flourish within the state of Ohio. This analysis aims to better understand the program and determine whether the program could generate positive long-term social impact. We hope to release this analysis some time over the next few months, so stay tuned for more updates!

What is “economic growth?”

When I started Scioto Analysis in 2018, the first thing I did was conduct a study on economic growth. Even before I registered with the Secretary of State’s office, created a website, or even told most people I was starting this practice, I was working to investigate what economic growth looks like in the United States.

In January, I wrote a blog post about what defines “the economy.” The definition I put forth is the following:

“The Economy” = Formal Market Activity + Informal Market activity + Nonmarket Activity + External Costs and Benefits of Market Activity

Overall, when we talk about “the economy,” we are talking about the sum of all the stuff (tangible and intangible) in society and the intensity of people’s desires for that stuff. We measure the sum of stuff by counting it and we measure the intensity of people’s desires for stuff by estimating their “willingness to pay” for it.

The core measure we use at Scioto Analysis to estimate the size of the economy is the Genuine Progress Indicator, a “GDP+” measure that estimates the economic value of environmental and social indicators next to traditional economic indicators.

The value of the Genuine Progress Indicator is that it gives us a holistic picture of the economy, correcting for problems in Gross Domestic Product like valuing environmental damage cleanup and excluding economic activity like caring for children at home. Another value of the Genuine Progress Indicator is that it gives us an idea of how the economy has changed over time.

A chart that usually comes with a Genuine Progress Indicator study is a line chart comparing growth of the economy as measured by the Genuine Progress Indicator compared to the growth of the economy as measured by Gross Domestic Project. The figure below is from our 2023 study comparing the two measures and their relative growth over time. The trend is usually the same in Genuine Progress Indicator studies: once you factor in the adjustments for environmental damage, social value, and economic growth that the Genuine Progress Indicator makes, economic growth is not as robust as it is under Gross Domestic Product.

So how do we know if a public policy will grow or shrink the economy? That is the task of cost-benefit analysis.

Cost-benefit analysis has at times been described as “applied welfare economics.” When we say “welfare,” we’re not referring to the shorthand for social programs that give assistance to low-income people. We’re talking about welfare in the sense that it was used in the preamble to the United States Constitution, when one of the aims of the document was to “promote the general welfare.” 

More specifically, when we say “welfare,” we’re talking about it in the sense of Arthur Pigou in his foundational text in welfare economics, The Economics of Welfare.

Basically, “welfare” defined in this sense is the same definition we have for “the economy”: it is the sum of all the tangible and intangible stuff people have a willingness to pay for minus the sum of all the tangible and intangible stuff you would have to pay people to have. So a society that has more stuff people want is a society with a larger economy (higher “welfare”) than a society with less of that stuff.

Cost-benefit analysis is the systematic analysis of a public policy to see if it grows the economy (increases welfare) or shrinks it (decreases welfare). Whenever we are conducting a cost-benefit analysis, that is the project we are undertaking.

This is admittedly an opinionated take on the definition of “the economy.” Many people will claim that “the economy” should be restricted to activity conducted in formal markets to limit confusion. The line grays here, though, with informal markets where dollars change hands and taxes are not paid. Or with nonmarket activity like spending your time caring for children at home while not being paid for it. Or external costs and benefits. While there is certainly value in analyzing the formal market, drawing the line of consideration of public policy at its boundaries leaves a lot out, even when just trying to answer this admittedly narrow question of how we maximize the amount of stuff people want in a society.

Another objection to this line of thinking comes from an environmental sustainability angle. There are a lot of thinkers in the environmental economics world who are skeptical of the idea of growth due to concepts of planetary limits. This has led many to be drawn to ideas like Kate Raworth’s Donut Economics. But “maximizing the stuff people want in society” does not mean “maximizing material goods.” A full conception of the “economy” acknowledges that allowing wild land to not be used and developed is a type of “stuff” that we can elicit willingness to pay for with survey research. The same goes for the value of basic research, time spent with family and resting, reductions in risk of death, and even the value that people in the future place on ecological stability. If anything, this conception of “the economy” is better at promoting ecological stability than either a narrow conception of the economy focused on formal economic activity or the faint sketch of a framework laid out in books like Donut Economics.

An objection someone may have to the value of economic growth can come from another angle, and I’ll call this the “Buddhist Objection.” The objection is this: why should strength of preference matter? If an advertiser is able to convince someone to the point where their willingness to pay for a pair of jeans rises from $40 to $400, does value really increase tenfold? Conversely, if someone learns to live more simply, desiring less, should we consider that a loss to society as a whole?

I think this last critique of economic growth is a deeper one, and gets at something more fundamental than these other critiques. What I think makes it a valuable critique is that it gets at something we also focus on at Scioto Analysis: the essential pluralism of public policy analysis.

No one framework will be able to tell us with certainty what makes good public policy. The policy with the highest net present value, which means it grows the economy and general welfare the most, is not always the “best” public policy. Neither is the policy that reduces poverty and inequality the most, that improves health and education the most, or that improves subjective well-being the most. Each of these frameworks is just one way for us to understand a deep question that people have debated for millennia: what makes a good society?

My most truthful answer to this question is “I don’t know.” My most practical answer to this question is that a society where more people have more of what they want, where poverty and inequality is lower, where the population is healthy and educated, and where people evaluate their lives positively is a probably better society than one where people have less of what they want, where poverty and inequality is high, where people are unhealthy and lack education, and where people believe their lives are not going well. And we as analysts have precisely the tools to help us evaluate which of those worlds we live in and how to get closer to one than the other.