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Block Grants and Tiebout Sorting

Block grants are a type of grant-in-aid that the central government of a nation uses to endow the state governments with a specific amount of funds to address public developmental projects such as social services, education, community development, healthcare and law enforcement.

If the government redistributes the block grant for educational development based on median voter wishes, then there would be fewer restrictions on the purposes and would have least secretarial conditions which is usually present for any type of federal grants. On the other hand, if the government provides the grant through conditional blocks, then the state government must have to follow the federal guidelines and the conditions for spending the fund on that specific purpose (Dilger and Boyd)

Tiebout sorting deals with the non-political solution to the free rider problem in the local governmental activities. If perfect Tiebout sorting is present in the world, then it would solve two major issues of the government: preference disclosure and preference aggregation. People do make their residential choices based on the quality of public schools in their locality. People also tend to move to that locality where the government spends more on the education facility. (Corcoran), but they will not reveal their preference about public goods initially, which leads to a free rider problem in the economy.  Hence, the government should redistribute the grants from high-revenue, high-spending school districts to the low-revenue and low-spending districts, so that people move to those districts and help to develop the districts by paying more taxes and expenditure on houses and other public goods.

The main informational asymmetry in the higher education market is that low income students are mostly unaware of the students’ welfare and enrollment programmes of elite colleges and university. Many elite colleges and universities have introduced programmes for low income but talented students to enroll without paying any or very nominal fees. These are aimed at helping the highly academically qualified and talented but low income students who cannot afford the cost of education. This is a type of market failure as the economy is losing out talented students.

Hoxby and Avery suggested that it is important to identify the pool of high achieving, low income students. The colleges should look for the low-income high-achieving students in proper places rather that ‘searching under the lamp’. The colleges must follow some methods to inform the students about the opportunities, such as, management visits to the high schools, campus visits by senior students, college and university access programmes, contacts and sessions with teachers and professors of selective colleges etc.

Social Welfare Systems

The policymakers should consider skill level of workers, the amount of government budget allocated for social development and the environment while designing the social welfare system (Cassidy).

Figure 1: Difference in work incentives in food stamps and EITC programs

(Source: Cassidy)

The implementation of EITC had a significant issue, which was a concern to several low-income populations group, which had an impact over the constraints of budget and fiscal development. The significant improvement in the welfare and economic of single mothers can be accorded to the EITC policies which had a substantial evaluation objective. The regulations that were implemented emerged to develop the skills in restraining on the budget scenario that coordinated along the lines of the EITC phase-in and phase-out phenomenon.

The figure 2 below depicts the welfare goals of the food stamp policy.

Figure 2: Goals of the food stamps policy (SNAP)

(Source: Author)

Figure 2 depicts the goals of SNAP. The Supplemental Nutrition Assistance Program (SNAP) is the anti-hunger program of the country. In 2015, 45 million low-income Americans could afford a nutritionally adequate diet due to SNAP ("Policy Basics: Introduction To The Supplemental Nutrition Assistance Program (SNAP)".

The welfare of food stamp policies should be given in terms of kind, as people might spend the cash to buy things other than food. Hence, to fulfill the objectives of food stamp policy it is feasible to give the benefits in kind in the form of food items.

The results of Hoynes and Schanzenbach show that expanding resources in childhood (up to age 5) can lead to improved health conditions in the adulthood. Beyond age 5, these do not generate improved health outcome. The near-cash nature of food stamps vouchers do not imply anything about biological changes in health conditions in the long run. However, the greater the availability of food stamps, greater is the food consumptions.

People go to cast their votes because everybody wants to participate in making the democracy. According to voter choice theory, if everyone thought voting was irrational, then nobody would cast his vote and democracy would disintegrate. This is known as ‘magical thinking’. This is a common fallacy too. People think if they go to cast their vote, others will go too, and if they do not, others will not go too. But in reality that is not true. Another reason is the civic duty of the citizens to vote in the elections. The duty to uphold the democracy falls on the citizens, and only by voting, the citizens can fulfill this duty (Antunes).

Voter Choice Theory

The voter turnout is highest in the swing states because it is the swing states who decide the fate of the election. People in the non-swing states believe that their votes do not make much difference in the election result; hence, the percentage of voter turnout is comparatively less. People in the swing states know that their votes can decide the election result. Thus, the swing states are very crucial during the elections, and the voter turnout is very high.

Moral hazard refers to the changes in behavior of people when they are insured against losses. In the health care sector, the moral hazard possesses both problems and benefits for the survival of the industry. Experts predict that people might sign for the insurance only when they fall sick. It may harm the objectives of the Obamacare policies to include maximum number of citizens under healthcare. On the other hand, when the people are insured, they tend to purchase more healthcare than required, which they would not have purchased otherwise.

Dead weight loss


Marginal cost of health care

Quantity of healthcare

Marginal benefit of health care

Optimum and efficient quantity

Quantity demanded if price with insurance = 0

Figure 3: Moral hazard in healthcare

(Source: Author)

The results of Finkelstein, et al. (2012) and Card, Dobkin, and Maestas (2008, 2009) suggest about utilization of health care and health outcomes after individuals receive health insurance, that, people tend to sign up for insurance after the age of 65. However, the health outcomes are difficult to assess, and they are not always dependent on insurance coverage. The authors show that insurance coverage jumps from 90% to 98% at the age 65 for the total population. The increase in coverage is more for less educated sections of the society, the gap of the coverage between less educated and educated group falls from 20% before age 65 to 5% after 65. It is depicted in the figure 4 below.

Figure 4: Moral hazard with health insurance

(Source: Author)

Infrastructure investment yields economic growth and development if is allocated to high-value projects and construction done in cost effective way (Merler). It has been found that government involvement in infrastructural development has often led to waste and inefficiency. Mostly there is mismanagement of funds and overrunning of costs. Other issues are: repetition of mistakes, too much regulations, misallocation of funds, inefficient workers (Edwards).

Poor infrastructure is one of the main barriers to economic growth. It reduces accessibility to basic needs of the society, such as, health care, markets, industry and education. The rising energy prices and lagging international economy are putting tremendous pressure on the federal budgets of many USAID countries and this stalls investments in many infrastructural development projects as well as in maintenance work. Although USAID provides huge amount of funds for infrastructural development in many countries, especially in crisis and disaster affected countries, this consists of a very small portion than what is needed. The international rules and regulations about FDI and grants-in-aid also create barriers in the financing. Private financing is also required to meet the needs for infrastructure, which is not present in most cases. Hence, the infrastructure quality has degraded over time in US and other countries (Usaid.Gov).

Moral Hazard in Healthcare

Jonathan Gruber discusses in his book ‘Covering the Uninsured in the U.S.’, that USA is the only industrialized nation, which does not provide universal healthcare facilities to its citizens. 47million or 18% of young Americans do not have health insurance (Gruber).  In his study, Gruber focuses on the reasons behind such huge numbers of the uninsured and policies to handle the problem. He cites that, not all uninsured are poor. The non-elderly Americans mostly receive health insurances from their employers. However, there are some, who do not receive it from the employers or simply do not sign for it. The reasons behind not opting for insurances are the sky-high premium price and less expected benefits than the cost of premium. To cover the administrative costs, the companies charge a very high premium, which makes insurance unprofitable for healthy people.

Cost-effective analysis compares relative cost and effects of different actions and it is most commonly used in health services. The health or cost effectiveness curve represents the ratio of health gain to the cost associated with health gain. The outcome measure is called quality-adjusted life years (QALY). This curve represents the uncertainty regarding the estimates of cost-effectiveness. It shows the probability of accepting a cost of health careagainst the maximum willingness to pay per QALY.

Figure 5: Health Effectiveness Curve

(Source: Author)

It can be said that, people would like to pay more per QALY if the probability of gain is much higher.

Hence, it is profitable to cover the uninsured people for healthcare, than making the current insurances more generous. The already insured people would not like to pay extra for additional benefits, as the probability of gain is low. The cost of premium is already high enough to discourage the insured people to pay some more, while if the government can reduce the premium then more people would be interested to take up the insurance. It would automatically generate more revenues for the insurance companies, and would yield higher health care benefits for the masses (Fenwick and Byford).

Author used the work of Card, Dobkin, &Maestas (2008, 2009) ‘Does Medicare Save Lives?’ to show the impact of access to health insurance coverage on health care utilization and health outcomes. In the methodological approach, author Used linear probability model to interact quadratic age with over-65 status, aggregated by demographic groups. Model is initially fitted for insurance outcomes, then health care outcomes. Methodology also regress discontinuity in healthcare outcomes at 65 on discontinuity in insurance at 65 across demographic groups. This is to indicate whether this is the primary explanation for differences.

Infrastructure Investment for Economic Growth and Development

Result: Onset of Medicare eligibility at age 65 leads to sharp changes in the health insurance coverage. This change led to increase in the use of medical services. While routine doctor visits increase more for groups that previously lacked insurance. Hospital admissions for relatively expensive procedures like bypass surgery and joint replacement increase more for previously insured groups that are more likely to have supplementary coverage after 65. This reflects the relative generosity of their combined insurance package under Medicare.

Education production function is the application of production function in the field of education. The inputs affecting a student’s learning are schools, teachers, family, neighborhood, peers etc, and the outcomes are achievement of the student in school, college or in the labor market, attendance, performance scores etc. The education production function looks like a conventional production function and it works in the same way too. The output is a function of all the inputs.

Output (Rank of the students)



Input (Expenditures per students)

Figure 6: Education Production Function for students of Washington and Oregon

(Source: Author)

Figure 6 shows the Education Production Function (EPF) of Washington (WA) and Oregon (OR). From the table data, it is evident that WA spends more money in the education sector; this brings about better achievement score of the students.

Author used the work of Conlin & Thompson (2014), ‘Equity and Unrestricted Funds in Special Education’ o show the impact of certain educational inputs on student achievement. In the methodological approach, the author used unique panel dataset that includes detailed annual district level financial and enrollment information for local and intermediate school districts in Michigan. Their study focused on how the provision of special education services and district wealth are related to this use of unrestricted funds.

Result: Financial burden associated with using unrestricted funds for special education expenditures is significantly greater for the poorest districts due to their larger fraction of special need students. Students receiving special education services vary with district wealth and this variation is likely attributable to both compositional differences of special need students and financial incentives that create differences in the special education identification and services. While unable to quantify the compositional and incentive effects, our results clearly document large inequities in special education funding across Michigan school districts.


"Infrastructure". Usaid.Gov, 2017,

"Policy Basics: Introduction To The Supplemental Nutrition Assistance Program (SNAP)". Center On Budget And Policy Priorities, 2016,

(Hoynes and Schanzenbach)

Antunes, Rui. Theoretical Models Of Voting Behaviour. 1st ed., College Of Education - Polytechnic Institute Of Coimbra, 2016,

Card, David, Carlos Dobkin, and Nicole Maestas. "Does Medicare save lives?." The quarterly journal of economics 124.2 (2009): 597-636.

Cassidy, Michael. "The EITC—Our Biggest Program For The Working Poor". The Century Foundation, 2015,

Corcoran, Sean P. Tiebout Sorting. 1st ed., Thousand Oaks, New York University, 2014,

Dilger, Robert Jay, and Boyd, Eugene. Block Grants: Perspectives And Controversies. 1st ed., Congressional Research Service, 2014,

Edwards, Chris. "Infrastructure Investment". Downsizing The Federal Government, 2017,

Eissa, Nada, and Jeffrey B. Liebman. "Labor supply response to the earned income tax credit." The quarterly journal of economics 111.2 (1996): 605-637.

Fenwick, E., and Byford, S. "A Guide To Cost-Effectiveness Acceptability Curves". British Journal Of Psychiatry, 2015,

Finkelstein, Amy, et al. "The Oregon health insurance experiment: evidence from the first year." The Quarterly Journal of Economics (2012): qjs020.

Gruber, Jonathan. Covering the Uninsured in the US. No. w13758. National Bureau of Economic Research, 2008.

Hoxby, Caroline M., and Christopher Avery. The missing "one-offs": the hidden supply of high-achieving, low income students. National bureau of economic research, Cambridge, MA 02138, 2012,

Hoynes, Hilary Williamson, and Diane Whitmore Schanzenbach. "Work incentives and the food stamp program." Journal of Public Economics 96.1 (2012): 151-162.

Hoynes, Hilary Williamson, and Diane Whitmore Schanzenbach. Work Incentives And The Food Stamp Program. 1st ed., California, NEBR, 2010,

Merler, Silvia. "The US Infrastructure Investment Debate". Bruegel, 2016,

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