Question

Other goods spending $1,000 500 IC $1,000 National Park Visit 0 500

1. Compare the three options in terms of effectiveness and equity. What are the substitution and income effects of the lump-sum income grant and voucher? Note: Explain by drawing indifference curves and budget lines. Let the X-axis denote national park visit, and the Y-axis denote other goods spending.

Option 1: The government provides 50% of a price subsidy on the entrance fee; the government provides $1 of funding from the state for each $1 expended on a national park visit.

Option 2: The government provides a lump-sum income grant, a grant of some fixed amount with no mandate on how it is to be spent; the government gives the same amount of grant as it spends for the first measure.

Option 3: The government provides a voucher, a fixed amount of money distributed to low-income families with a mandate that the money be spent only on a national park visit; the government also gives the same amount in a voucher as it spends for the first and the second measures.

a) What measure maximizes the welfare gains to low-income families from redistribution?

b) What measure is the best way to encourage national park visits?

Answer 1

Income Effect denotes increased purchasing power of a consumer, while Substitution Effect shows how consumption pattern changes with changing income and prices.

Option 1:

50% of a price subsidy on the entrance fee

$1 of funding from the state for each $1 expended on a national park visit

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Option 2:

lump-sum income grant ( a grant of some fixed amount with no mandate on how it is to be spent )

the government gives the same amount of grant as it spends for the first measure

In this option government is giving income grant without any expenditure mandate. It means a person can spend his money anywhere, it is not necessarily on National Park Visit. So the ratio of visit may go higher or low, depending upon the person's personal choice of spending. Suppose income is USD 500 but he is spending only USD 100 on National Park Visit or Vice Versa.

2 rus 0 loo 40 So 0 3100 1ooo SOD

Option 3:

government provides a voucher, a fixed amount of money distributed to low-income families with a mandate that the money be spent only on a national park visit

government also gives the same amount in a voucher as it spends for the first and the second measures

aris Spond OPTION 1 goo 1006

Answer Part (a)

Option 3 is maximizing the welfare gains to low income families, as the income grant is given by government alongwith national park visits to raise standard of living. It has good impact for increasing societal development. Although the government expenditure will increase by taking such initiative and it will definitely increase budget of the country.

Answer Part (b)

The best measure to increase the foot fall in National Park is Option 3, because the government made the visit mandatory which will definitely increase the number of visitors.