1. Some have argued that diversity in communities and schools leads to positive externalities. What implications does this view have for the efficiency of a Tiebout equilibrium? What implications does it have for government policy?
2. The state of Minnegan is considering two alternative methods of funding local road construction, matching grants and block grants. In the case of the matching grant, Minnegan will spend $1 for every $1 spent by localities.
a. What is the price of an additional dollar of local spending in each case?
b. Which of the two methods do you think would lead to higher levels of local spending on roads? Explain your answer.
3. The town of Greenville has three families, each with one child, and each of which earns $20,000 per year (pre-tax). Each family is taxed $4,000 per year to finance the public school system in the town, which any family can then freely attend. Education spending is $6,000 per student in the public schools. The three families differ in their preferences for education. Though families A and B both send their children to the public school, family B places a greater value on education than family A. Family C places the greatest relative value on education and sends its child to private school.
a. Graph the budget constraints facing each of the three families and draw a possible indifference curve which could correspond to the choice each family makes.
b. The town is considering replacing its current system with a voucher system. Under the new system, each family would receive a $6,000 voucher for education, and families would still be able to send their children to the same public school. Since this would be more costly than the current system, they would also raise taxes to $6,000 per household to pay for it. Draw the budget constraint the families would face under this system.
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