Question

                                                                      State and Local Government Expenditures

The city of San Alameda provides free health care services for the medically indigent (poor and uninsured). Suppose the city has $2 million to spend on these services and private goods. One unit of health care services (e.g. a physician office visit) costs $110. Thus, the budget equation for San Alameda for these two types of goods is:

$2 Million = $P + $110H,

where H is the units of indigent health care services provided, and P is total expenditure on private goods (P is measured in dollars because we assume each unit of P costs $1).

1. If the San Alameda spends equal amounts on indigent health care services and the private good, how many units of health care services are purchased by the city?

2. Suppose the city of San Alameda receives a 40-percent matching grant from the state for spending on indigent health services. Specifically, the state spends $0.40 on indigent health care services for every $1 spent by the city on these services.

2a) If, after receiving the grant, San Alameda spends $1 million on the private good, how many units of indigent health care services are purchased? (Round to nearest whole number)

2b) Under matching grant, how much of total indigent health care expenditures is paid by the state?

2c) What is the effective price of health care services for the city of San Alameda under the matching grant? (Enter a formula to calculate the effective price.. show work)

3. Suppose, instead of a matching grant, the state provided the city of San Alameda a block grant equal to what the state would have spent with the matching grant (2b. above). Suppose, also, San Alameda uses its budget plus the block grant to spend equal amounts on indigent health care services and the private good.

3a) How many units of indigent health care services are purchased by San Alameda?

4. Using relevant economic concepts, explain why a matching grant generally leads to more consumption of a public good than an unrestricted block grant.

Answer 1

1. total budget			2000000
spend on indigent (half of budget)			1000000
cost per visit			110
number of visits (spend / cost per visit)			9091
2a. Spend on indigent healthcare by the city			1000000
additional money from state (grant 40%)			400000
total money available for indigent healthcare			1400000
cost per visit			110
number of visits (total money for spend / cost per visit)			12727
2b. Amount of money paid by the state			400000
2c. Effective price per visit incurred by the city			78.57143
price per visit / (1+40%, where 40% represents the contribution from state)
3a. Total money available to the city			2400000
its own budget + grant by the state as per 2b
spend on indigent (half of budget)			1200000
cost per visit			110
number of visits (spend / cost per visit)			10909
4. matching grants work more effectively than an unrestricted block grant
since a matching grant is available only when the recipient (city in this case)
spends its own money first on the public good or service in question. This
creates demand for such public good. If, on the other hand, the grant is
unrestricted the recipient would like to spend the money in any manner it likes
this could lead to the money being spent on things (goods or services) other than
the public good in question