Reference no: EM132207463

Question: As a general rule, cities are non-profit organizations and elected officials hire managers to operate the various departments which provide services (e.g., trash collection, street repair, etc.). Suppose cities of all sizes across your state/province/region become profit-seeking corporations. They will issue stock, the stock will be traded on a national exchange (e.g., NYSE), they will have a Board of Directors which will appoint all city officials. Any economic agent with the means may purchase stock. As usual, shareholders will elect members of the Board. Furthermore, the city will no longer be permitted to tax any economic agent (i.e., household, consumer, or business). Assume all stockholders have a share of ownership in the city.

a) Will the new system increase or decrease incidents of Moral Hazard by city officials/managers compared to the old system? Explain your answer. Note: First you must clearly state a given city manager's objective. Then compare the incentives this manager faces under the two systems.

b) List and discuss 2 externalities (positive or negative) which would result from having for-profit cities. Clearly state who the recipients are of the externalities as well as the source(s). Remember to choose and clearly state a primary activity.

(Some cities (e.g., Cincinnati, Ohio) have a City Manager who runs the day-to-day operations. The elected officials appoint this individual and s/he has no policy-making authority. It is simply an administrative.