NBA All-Star Game and Inelastic Supply

The Arizona legislature has discovered the consequences of taxing an inelastic supply.

State lawmakers hope to lure the 2009 NBA All-Star Game to Phoenix by waiving the state sales tax charged on tickets for the game and its associated attractions.

Supporters of the incentive, which would be worth $300,000 to $400,000 to the NBA and its assorted sponsors who purchase the tickets, say it could help the city land the event and the worldwide exposure and economic windfall that come with it.

But the sales-tax waiver is caught up in state budget negotiations - it's included in the House's proposal, not the Senate's - and is targeted by critics who call it a tax giveaway to big corporations...

"It seems absolutely ridiculous," Cheuvront said of the All-Star Game offer. "I don't support it. I don't think it's good public policy. The tickets sell out anyway."

Verschoor said he's "open to taking a look at it," but also called it "kind of irksome" that the sales-tax waiver would most benefit the NBA and major corporations, not fans.

The supply of seats in a stadium is perfectly inelastic. The marginal cost of providing the next seat is essentially zero right up to the capacity of the stadium. At that point, it becomes essentially infinite.

When you tax something that has a perfectly inelastic supply, the supplier pays all of the tax. Conversely, when you lower the tax, the supplier reaps all of the benefit.

The NBA would prefer to make more money, not less, so they shop around for places that allow them to do that. There are other benefits to hosting the game however.

Las Vegas hosted the All-Star Game and its four days of festivities earlier this year. Officials there say the event attracted 85,000 visitors and created nearly $91 million in local economic impact.