Because nonresidents benefit from local government public safety services, suppose that the federal government offers localities a matching, categorical grant equal to $1 for $1 of local tax money spent on public safety.

(a) What is the effect of this grant on the price of spending for public safety to these localities? How might the grant correct for the spillover problem?

(b) Suppose that Central City currently levies a property tax for public safety at a rate of $10 per $1,000 of taxable value on a base of $10 million of taxable property. If the price elasticity of demand for public safety in Central City is 0.2, calculate and explain the expected effect of the grant on public safety spending, public safety taxes, and tax rates in Central City.