Question

Both the Springfield public schools and the Shelbyville public schools are fully financed by local taxes of 1% on all property. In Shelbyville, the average house is worth $150,000 while houses in Springfield are only worth $100,000 on average. Each town has 10,000 houses and can decide to spend its tax revenue on schooling R and on other community goods X.

a) What is the total amount of tax revenue in each town? On the same graph, draw the budget constraint for both school districts.

b) The state government wants to equalize spending in the two districts. To do this, it provides a block grant to Springfield for the difference in the tax revenues between the two towns. Assuming there is no effect on property values, will this necessarily lead to the same amount of spending across districts? Explain.

c) Concerned that offering unrestricted grant aid to Springfield is not working to equalize spending, the sates restricts the grant aid to be spent on education. Under what conditions will this lead to an increase in education spending in Springfield equal to the grant amount?

d) The government now offers a matching grant to Springfield, such that for every dollar spent by Springfield on education, the state will provide a grant of $1. What is the formula for the new budget constraint? Draw the budget constraint. Is the grant likely to increase, decrease, or keep constant the spending on education relative to all other community goods in Shelbyville?

Answer 1