6. [15 points) The state of California is considering funding local protection for forest wildfires. Forests are a valuable resource and protecting them could be considered a public good. The state has two alternative methods of funding: lump-sum grants and matching grants. In the case of matching grants, the state of California will spend $1 for each $1 spent by local governments on forest protection from wildfires. In the case of lump-sum grants, the state will just give fixed dollar amounts to different localities. (a) What is the price of additional dollar of local spending in each type of grants? [5 points] (b) If the dollar value of both types of grants to a locality is same, which type of grant will lead to higher levels of spending on forest protection? Explain using the concept of income and substitution effects (5 points] (c) The national government recognizes the importance of saving forests from wildfires and announces a matching grant with a matching rate of 0.8. As a result, a local government now receives two matching grants, one from state (R = 1) and one from federal government (R = 0.8). What is the price of additional dollar of local spending with these two grants? (5 points) 2. [10 points] [Optimal government size] (a) The city of Winter Park has a population of 1000. All the residents of Winter Park have same demand for public goods. The marginal welfare loss from additional resident in the city is 20+2N, where N is the number of additional residents. This welfare loss arises due to different demand for public goods by additional residents. However, the services provided by city of Winter Park has spatial externalities and the marginal welfare gain from internalizing this externality is given by 100-2N. How many more residents should be added to Winter Park? [4 points) 1 (b) There is a lot of variation in demand for public good A. This good can be provided either at city level or at national level. Which level of government should provide good A? Explain why. [3 points) (c) There is a large spatial externality associated with a public good B, such that everyone in the country benefits from This good can be provided either at city level or at national level. Which level of government should provide good B? Explain why. [3 points) 6. [15 points) The state of California is considering funding local protection for forest wildfires. Forests are a valuable resource and protecting them could be considered a public good. The state has two alternative methods of funding: lump-sum grants and matching grants. In the case of matching grants, the state of California will spend $1 for each $1 spent by local governments on forest protection from wildfires. In the case of lump-sum grants, the state will just give fixed dollar amounts to different localities. (a) What is the price of additional dollar of local spending in each type of grants? [5 points] (b) If the dollar value of both types of grants to a locality is same, which type of grant will lead to higher levels of spending on forest protection? Explain using the concept of income and substitution effects (5 points] (c) The national government recognizes the importance of saving forests from wildfires and announces a matching grant with a matching rate of 0.8. As a result, a local government now receives two matching grants, one from state (R = 1) and one from federal government (R = 0.8). What is the price of additional dollar of local spending with these two grants? (5 points) 2. [10 points] [Optimal government size] (a) The city of Winter Park has a population of 1000. All the residents of Winter Park have same demand for public goods. The marginal welfare loss from additional resident in the city is 20+2N, where N is the number of additional residents. This welfare loss arises due to different demand for public goods by additional residents. However, the services provided by city of Winter Park has spatial externalities and the marginal welfare gain from internalizing this externality is given by 100-2N. How many more residents should be added to Winter Park? [4 points) 1 (b) There is a lot of variation in demand for public good A. This good can be provided either at city level or at national level. Which level of government should provide good A? Explain why. [3 points) (c) There is a large spatial externality associated with a public good B, such that everyone in the country benefits from This good can be provided either at city level or at national level. Which level of government should provide good B? Explain why. [3 points)
