Assignment: State and Local Finance

1. A number of states have established stabilization funds that are paid into in years when the state's economy is strong and drawn from when the state's economy is in recession. This means that state taxes are greater than spending in good economic years and less than spending in bad years. How can these contingency funds stabilize a state's economy?

2. Consider the process of earmarking. Explain what it is. Explain how it can lead to inefficient levels of expenditures by the state or local governments. Explain how it can lead to more efficient levels of expenditures by the state or local governments. Use examples for each.

3. Many state and local governments are experiencing a pension crisis. What is the source of this crisis? Last year the stock market had a strong increase and is up again so far this year. What effect, if any, does this have on the pension crisis?

4. "If one city spends more on police protection per capita than does another, one expects less crime in the first city than the second." True, false, or uncertain? Explain your answer.

5. Explain the Baumol hypothesis about the effects of unbalanced growth. Support your answer with diagrams.