A community is considering how to allocate expenditures between education and other goods. Draw the budget constraint, putting "education" on the horizontal axis, and "other goods" on the vertical.
a. Contrast the budget constraint of a poor community with that of a richer community. Using in difference curves, explain why a poorer community is likely to spend less on education than a richer community.
b. Show how the deductibility of property taxes, used to finance public education, affects the budget constraints of the two communities. How does it affect choices? If the price elasticity of the demand for education is unity, what should be the effect on the demand for education in a community in which the median voter is in the 33 percent marginal tax bracket? Or in a 15 percentage tax bracket?
c. Assume now that the poor community is subsidized (and the rich community taxed) so that the extra educational expenditures it gets from a 1 percent tax is the same as that of a rich community. Draw the budget constraints.
Will the poorer community continue to spend less on education than the richer community? On what does your answer depend?
d. Whose in difference curve is relevant for the analysis?