Econ 131
Monica Singhal
UC Davis
Assignment 6
Due at the beginning of Class, May 31, 2017
Students are encouraged to work on assignments in small groups of no more than four students.
Assignments must be written up separately and must include the names of the other group
members. Assignments should be handed in at the beginning of class on the due date. Late
assignments will not be accepted under any circumstances.
1. School Finance Equalization
Consider the town of Lexington, which is choosing between spending on education and spending
on all other private goods. Suppose the town has a total of $2 million to spend.
(a) Now suppose that the state government tells Lexington that any funds allocated toward
education above the amount of $750,000 will be taken by the state government. Draw
Lexington’s budget constraint under this scenario.
(b) Suppose Lexington was spending $200,000 on education before the policy. What is the tax
price of educational spending after the policy? How much will Lexington spend on
education? How much will it spend on all other goods?
(c) Suppose instead that the state government decides to take away only $0.60 for every $1
Lexington allocates to education above $750,000. Draw Lexington’s budget constraint under
this scenario.
(d) Suppose Lexington was spending $1,000,000 on education before the policy (when there was
no interference by the state government). What is the tax price of educational spending after
the policy?
(e) Again suppose Lexington was spending $1,000,000 on education before the policy. Will the
income effect of the policy cause Lexington to spend more or less on education? Will it cause
Lexington to spend more or less on all other goods? Explain.
(f) Again suppose Lexington was spending $1,000,000 on education before the policy. Will the
substitution effect of the policy cause Lexington to spend more or less on education? Will it
cause Lexington to spend more or less on all other goods? Explain. (g) Again suppose Lexington was spending $1,000,000 on education before the policy. At
Lexington’s new optimal point with the policy (wherever it is), will it spend more or less on
education than before the policy in (c) was put into place? Will it spend more or less on all
other goods?
(h) Now consider school finance equalization programs more generally. Suppose that after a
school finance equalization program there is greater equality in test scores (and other student
outcomes) across districts (recipient districts and those that are taxed to provide funds). Why
might this not be sufficient evidence to conclude that the program was a success? Explain (23 sentences) 2. Estate Taxation
After considering the material from class and the readings, what position would you take on
repealing the estate tax in the US? Please summarize what you see as the key arguments in favor
and against repeal and then explain how you weighed these arguments in coming to your
decision (200-300 words).

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