President Clinton's crime bill from 1994 suggested a federal program that worked much like a price subsidy; the federal government would augment local government expenditures on police with additional funds from the federal treasury. Congressional Republicans wanted to replace this price subsidy with block grants to the states which would involve just giving the states a set amount of money which they could allocate as they chose. Suppose a state is receiving $100 million from the federal government under the current price subsidy system. Now suppose the funding is changed so they receive a $100 million block grant. Analyze the impact on spending for "police services" and "all other goods" for this particular state. In particular, will "police services" increase, decrease, remain unchanged or is it impossible to tell? Why?
President Clinton's crime bill from 1994 suggested a federal program that worked much like a price subsidy; the federal government would augment local government expenditures on police with additional funds from the federal treasury. Congressional Republicans wanted to replace this price subsidy with block grants to the states which would involve just giving the states a set amount of money which they could allocate as they chose. Suppose a state is receiving $100 million from the federal government under the current price subsidy system. Now suppose the funding is changed so they receive a $100 million block grant. Analyze the impact on spending for "police services" and "all other goods" for this particular state. In particular, will "police services" increase, decrease, remain unchanged or is it impossible to tell? Why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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President Clinton's crime bill from 1994 suggested a federal program that worked much like a price subsidy; the federal government would augment local government expenditures on police with additional funds from the federal treasury. Congressional Republicans wanted to replace this price subsidy with block grants to the states which would involve just giving the states a set amount of money which they could allocate as they chose. Suppose a state is receiving $100 million from the federal government under the current price subsidy system. Now suppose the funding is changed so they receive a $100 million block grant. Analyze the impact on spending for "police services" and "all other goods" for this particular state. In particular, will "police services" increase, decrease, remain unchanged or is it impossible to tell? Why?
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