Imagine that the federal government becomes concerned with the quality of air an
ID: 1125641 • Letter: I
Question
Imagine that the federal government becomes concerned with the quality of air and decides to promote the usage of electric cars such as Tesla. The government has two options. It can either offer a matching grant (one for one) or a block grant of equal value. (1): Which of the two options should the government resort to given its stated objective? (a)Matching grant (b) Always a block grant (c) The two must be equally effective as both happen to be of the same value. (2)Now assume that the government is interested in ensuring that the welfare is the highest. Which of the two options is more suitable now? (a)Block grant as long as it is smaller than the original value of consumption of electric cars (b)Always a block grant (c)The two must be equally effective as both happen to be of the same value.
Explanation / Answer
A matching grant is a grant set aside for a particular purpose or for a particular type of project, such as water conservation or planting trees in the local area, by the Local or State Government. A local citizen or group can set out a project proposal to the Government and apply for the grant. If the Government approves the project it will match the financial requirement either fully or more than fully (in a specified ratio.) In the example given in the question, it specifies a 1:1 ratio, meaning the Government will match the project’s financial requirement in that ratio. The project will be under the control of the group or person who took the initiative and might require the active participation of the local community. This grant works best in active communities with necessary skill sets and knowledge to put forward effective project proposals.
A block grant is a grant given by the Federal Government (Central/National Government) to the State Government (Regional/Local) or Local Authorities. A block grant has very few specifications or limits on how and where the grant ought to be spent. Therefore, they give the power of decision-making of the use of funds to the State or Local authority because it is argued that the State or Local Government knows best the needs of their local/regional citizens. It is also argued that block grants are more cost effective than a matching grant since they require less paperwork and federal administration. It also allows local governments to experiment with funds – for more innovative solutions to problems and local projects.
1) Given the stated objective of the Government being to improve the quality of air, by promoting the usage of electric cars, Option A would be the most effective in achieving the objective. It will ensure that the funds are matched exactly to the objective of using electric cars. It will allow local citizens the ability to propose to buy electric cars for which the government will match the requirement. Thereby, making it easier not only to achieve the said objective but also to analyze the effectiveness or popularity of the grant, which may help in appealing for a block grant in the future by the State for greater funding.
Option B may cause mismanagement of funds by Local Governments for objectives or purposes they consider more important or relevant to them. For example, if the Local Government believes that water conservation requires more attention than air pollution, they are at liberty to use the funds to achieve the objective of water conservation.
Option C- both need not be equally effective. Although they are of equal value, funds can be directed towards what the Local Government considers the more pressing or urgent need and therefore the Federal objective is not achieved.
2) Now the objective is the highest welfare of the community-
The highest welfare of the community requires that the Marginal Social Benefit= Marginal Social Cost according to Dalton (Principles of Public Finance)
This occurs when the additional burden to the taxpayer is equal to the additional benefit to the community of one more unit of government expenditure.
Option A is the best option- When the Government does not fully cover the cost of the electric car, it requires the citizen to put in a portion of his own funds which will ensure the car is used appropriately and maintained well. It also reduces the burden of the taxpayer.