Answer to Question #214772 in Finance for judas

Question

As a result of imbalance in revenue generation by provincial governments and local municipalities in South Africa, intergovernmental grants have been a important source of finance for Local Governments. The allocations of these funds for use in the local authorities have been questionable, some doubting if the funds are use for what they were earmarked for. Critically discuss, with the aid of diagrams the conditional no -matching grants with unconditional nonmatching grant?

Answer 1

Conditional Non-matching Grants offer a certain amount of funds lacking local matching, provided they are used up for a certain purpose while in Unconditional Non-matching Grant lacks constraints on how it is spent and no minimum spending in any area is projected.

An explanation for the curve.

The local government will always consume more of the publicly available good if there is a matching open-ended grant than if there is no corresponding closed-ended grant. Unconditional non-matching grants operate as a lump-sum subsidy, whereas open-ended matching grants act as a subsidy for each unit spent. An unconditional grant of l4 must be provided to enable the ingestion of OX. The new equilibrium will be at E2. The income effect of an unconditional non-matching gift is that it moves the budget restriction outward along the ICC.