Grants and Fungibility 5520_L_13_grants&fund 11/11/2018 Grants and Fungibility © Allen C. Goodman, 2015

Fungibility P. 211 has a good example. Let’s update. You have a budget of $75 per week for entertainment. You spend: $25 on Pizza $25 on Videos $25 on Mountain Dew Your parents come to visit and give you a $50 gift certificate to Buddy’s.

How much do your expenditures on pizza increase? Do they necessarily increase by $50? May increase by $50. May increase by less than $50 – there are other things you can buy at Buddy’s. May not increase at all – you sell the gift certificate to someone else … probably for less than $50 … why?

Let’s look at this through IC analysis. None of the extra funds go to E. All Other Let’s look at an unrestricted grant. Your town is given a block grant. Your demand for E is totally income inelastic. Slope = -1.0, why? A2 A1 E1 = E2 Education

Let’s look at this through IC analysis. ALL of the extra funds go to E. All Other Let’s look at an unrestricted grant. Your town is given a block grant. Your demand for E is very income elastic. Slope = -1.0, why? A2 = A1 These impacts depend on income elasticity E1 E2 Education

Let’s go back to matching grant All Other If we want to encourage spending on education, let’s go back to the $ for $ match. It may not be very price elastic Slope = -1.0, why? A2 A1 New slope = -0.5 E1 E2 Education

Let’s go back to matching grant %Impact = D Expenditures/ Size of Grant Let’s go back to matching grant All Other If we want to encourage spending on education, let’s go back to the $ for $ match. It may be very price elastic Slope = -1.0, why? Previous expenditures were E1. Size of grant is [E2/2]. Why? Why? Why? Impact? (Change in E/Size of Grant) % Impact = (E2 – E1)/(E2/2). A1 New slope = -0.5 A2 E1 E2 Education

Let’s go back to matching grant Getting $3750 (E2/2) Spending $2500 more! Let’s go back to matching grant All Other Previous expenditures were E1. Size of grant is E2/2. Why? Impact? Impact = (E2 – E1)/(E2/2). Slope = -1.0, why? So, if E1 = 5000, E2 = 7500 Impact? Impact = (7500 – 5000)/(7500/2) = 2/3, or 66.6% A1 New slope = -0.5 A2 E1 E2 Education

Why does it look like this? Extra $2000; can spend ONLY on education Why does it look like this? Some Kinky Things All Other A2 A1 E1 E2 Education

Some Kinky Things Extra $2000; can spend ONLY on education We’ll match first $2000,. AFTER THAT, you’re on your own. Why does it look like this? Some Kinky Things OR All Other All Other Whenever students see a kink, they think you HAVE to end up there. Not necessarily. A2 A2 A1 A1 E1 E2 Education E1 E2 Education

Thoughts on Fungibility Does “earmarking” ($X MUST be spent on item x) funds work? Is it done in nominal or real $? Are we starting from the right amount or the wrong amount? That is, are we currently spending the amount we really want. If not, then we might want never get to a target amount!

Next Time – Taxes! KEY IDEA – The tax ultimately falls on those who cannot avoid it. SECOND KEY IDEA – You can usually look at taxes either through supply or demand analyses.