ECON 203 Lecture 7: Lecture 7

Many states provide firms with an 'investment tax credit'€ that effectively reduces the price of capital. In theory, these credits are designed to stimulate new investment and thus create jobs. Critics have argued that if there are strong factor substitution effects, these subsidies could reduce employment in the state. Explain their argument. How does this affect the labor market?

Explain why or why not giving tax incentives to foreign businesses crowds out local investment.

Firms are motivated to minimize production costs because

a. the government provides tax credits and subsidies to low-cost producers.

b. least-cost production techniques use the smallest total quantity of resources

c. competitive pressures in the market will drive out higher-cost producers.

d. it is the most environmentally friendly way to produce goods