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Cocktail Economics: Discovering Investment Truths from Everyday Conversations by Victor A. Canto

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Chapter 6. California Is a Country: An Introduction to the Location Effect

If the state legislature of Rhode Island enacts a draconian law whereby businesses must pay a 50 percent tax on earnings produced within the state, will that law affect a company based in Peoria, Illinois? Well, if the Peoria company has factories in Rhode Island, that legislation will matter. If not, it probably will care less. Meanwhile, all the companies with operations in Rhode Island will have a significant shock to deal with—one that is location-specific, locked within 2,000 square miles of American turf.

When an economic shock lands on a specific geographic area, we can say the location effect is on. The Peoria example reveals this in a blatant way: If you don’t do ...

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