Question: (a) The Tiebout model:
(i) Why does the Tiebout model solve the preference revelation problem that is present with Lindahl pricing? (Remember: Lindahl pricing refers to pricing public goods according to the marginal benefit each individual receives)
(ii) The Tiebout model relies on rather extreme assumptions. Discuss at least four problems with Tiebout s approach.
(b) Consider a community that makes different spending decisions when offered a block grant than when offered a categorical grant of equal size.
(i) Does the community reach a higher level of social welfare under the categorical grant or under the block grant?
(ii) Does the categorical grant elicit more or less spending in the designated category than the block grant?
(iii) Does the categorical grant elicit a level of community expenditures in the designated category larger, smaller or equal to the size of the grant? Provide a detailed justification and a graphical illustration.