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Opportunity Cost of Attracting Industry

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The Itagi Computer Company From Japan is looking to build a factory for making CD-ROM's in the United States. The company is concerned about the safety and well-being of its employees and wants to locate in a community with good schools. The company also wants the factory to be profitable and is looking for subsidies from potential communities. Encouraging new business to create jobs for citizens is important for communities, especially communities with high unemployment.

Wellville has not been very well since the shoe factory left town. The city officials have been working on a deal with Itagi to get the company to locate in Wellville. Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed to buy the site for $50,000 for Itagi and not require any payment of property taxes on the factory by Itagi for the first five years of operation. The property tax deal will save Itagi $3,000,000 in taxes over the five years. This deal was leaked to the local newspaper. The headlines the next day were: "Wellville Gives Away $3,000,000+ to Japanese Company".

a. Do the headlines accurately describe the deal with Itagi?

b. What are the relevant costs and benefits to the citizens of Wellville of making this deal?

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Solution Preview

a. Do the headlines accurately describe the deal with Itagi?

The headlines do not accurately describe the deal. The media has been known for only using certain words to capture a story, which distort the meaning of the story. This is a good example of such a case. The city gave the company a tax abatement for a certain period. This is common in areas where development is being encouraged. People can build houses or companies can build assets in these types of areas, with no immediate burden of real estate (property) taxes being due on the land. It's a fairly common practice, so the ...

Solution Summary

This solution discusses the Itagi Computer Company, and if the headlines accurately describe the deal with the company. This solution also discusses the relevant costs and benefits to the citizens of Wellville.