Public Finance Questions:

1. A community's utility is U= √(VxE), where V is private goods spending in $ thousands and E is education spending in $ thousands. The community has a total budget of $2 million. The price of a unit of private goods is $1,000 and the price of a unit of education is $1,000.

a. What is the community's equilibrium level of private goods and education spending? Graph the budget constraint and indifference curve, labeling the equilibrium in your graph with spending on the axes in thousands of dollars.

b. Suppose the community receives a matching grant from the state of $1 for each $1 of spending by the local community. What is the community's equilibrium level of private goods and education spending with the matching grant? Graph the new budget constraint and indifference curve, labeling the equilibrium in your graph with spending on the axes in thousands of dollars.

c. Suppose that, instead of the matching grant, the community receives a $500,000 block grant from the state. What is the community's equilibrium level of private goods and education spending with the block grant? Graph the new budget constraint and indifference curve, labeling the equilibrium in your graph with spending on the axes in thousands of dollars.

d. Would this community prefer the matching grant or the block grant? Why?

2. Donations to the Alabama Opportunity Scholarship Fund (AOSF) qualify as tax credits rather than tax deductions.

a. Why would the State of Alabama qualify AOSF donations as tax credits rather than tax deductions?

b. Is this tax credit progressive or regressive? Why?

3. Describe the externalities argument for distributing money from one community to another. Provide an example of this kind of redistribution based on externalities. (your example needs to be "real world" and pertain to Alabama directly).