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]