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

2. 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.

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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!

12. 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.