Suppose that your state gives each town $5 million in aid per year. The way in which the money is spent is currently unrestricted, but the governor has proposed that towns be required to spend the...

Suppose that your state gives each town $5 million in aid per year. The way in which the money is spent is currently unrestricted, but the governor has proposed that towns be required to spend the entire $5 million on education. You can illustrate the effect of this proposal on your town’s spending on education using a budget constraint and indifference-curve diagram. The two goods are education and noneducation spending. a. Draw your town’s budget constraint under the existing policy, assuming that your town’s only source of revenue besides the state aid is a property tax that yields $10 million. On the same diagram, draw the budget constraint under the governor’s proposal. b. Would your town spend more on education under the governor’s proposal than under the existing policy? Explain. c. Now compare two towns—Youngsville and Oldsville—with the same revenue and the same state aid. Youngsville has a large school-age population, and Oldsville has a large elderly population. In which town is the governor’s proposal most likely to increase education spending? Explain.



May 25, 2022
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