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    Public Finance

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    A parcel of land is expected to yield annual rents equal to $10,000 per year forever. If the market rate of interest is 10 percent, calculate the market price of the land. Suppose you purchase the parcel of land. After your purchase, a 5 percent property tax on the land is imposed. Calculate the impact of the tax on the market value of the land parcel. Can you avoid the tax by selling the land?

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    Solution Preview

    The formula for calculating a property with perpetual yielding is PV= A/r, where PV is present value of the property, A is annual payments, and r is interest rate.

    Using this formula, PV = 10000/0.1 = 100,000. Your property is worth $100,000.

    With the property tax, there are two case. ...

    Solution Summary

    The expert examines public finance impact of taxes.