(Solved): Conditional versus Unconditional Grant The Regional Government has a budget of $10,000. It spends i ...

Conditional versus Unconditional Grant The Regional Government has a budget of $\$10,000$. It spends its money on sewage treatment $(\mathrm{X})$ and other goods $(Y)$. $\mathrm{Px}=\$200$ $\mathrm{Py}=\$100$ Suppose the Provincial Government wants to encourage the Region to invest more in sewage treatment and offers the Region a matching grant. For every $\$1$ the Region spends on sewage treatment, the Province will give it $\$1$. The Region is initially in equilibrium at $\mathrm{E}$. 1) If the Region were to take the conditional grant, what would be its utility improvement ? (1 mark) Page 4 of 5 2) What is the total expenditure required to purchase the new amount of sewage treatment? (1 mark) 3) How much of this required expenditure is from the conditional grant? (3 marks) 4) How much is from the Region's own budget? (1 mark) 5) If, instead of the conditional grant, the Province provided the region with an income transfer (i.e. an unconditional grant) equal to the amount of the conditional grant found in (3), would the Region continue to purchase the same amount of sewage treatment? If not, why not? (2 marks) 6) What is the amount of sewage treatment purchased under the unconditional grant? Why is the unconditional grant considered more efficient? (2 marks)