Question

After Hurricane Katrina, many agencies made emergency funds available to New Orleans.

(i) The United States Treasury led the effort by releasing a cash grant of $100 million to the local government immediately after the catastrophe, no strings attached. Please draw a simple diagram showing the effect of this grant on New Orleans’ state budget, and its utility maximizing choice of expenditures.

(ii) Another agency, the EPA wanted to ensure that all toxic and hazardous spills in the city were cleaned up. Given that New Orleans was already burdened with huge expenses on multiple fronts, what policy design would you recommend to EPA to make sure that its very specific goal is met? Should it follow the same funding model as the Treasury? Why or why not?

Answer 1

After Hurricane Katrina, the cash grant from the United States Treasury had a positive impact on New Orleans' state budget. The city had to make choices on how to allocate the funds for maximum utility. For EPA's goal of cleaning up toxic and hazardous spills, a different funding model with categorical grants may be more effective.

Step-by-step explanation:

Effect of Cash Grant on New Orleans' State Budget

The cash grant of $100 million from the United States Treasury immediately after Hurricane Katrina had a positive impact on New Orleans' state budget. This grant provided much-needed funds to help the city recover from the catastrophe. The diagram below illustrates the effect of the cash grant on the state budget:

Utility Maximizing Choice of Expenditures

After receiving the cash grant, New Orleans had to make choices on how to allocate the funds to achieve maximum utility. The city needed to prioritize its expenditures based on the most pressing needs. This could include rebuilding infrastructure, providing aid to affected individuals and businesses, improving emergency preparedness, and investing in long-term resilience measures.

Recommendation for EPA's Policy Design

The EPA should consider a different funding model than the one used by the United States Treasury for its specific goal of cleaning up toxic and hazardous spills in New Orleans. The Treasury's approach of providing a no-strings-attached cash grant may not be the most effective for EPA's goal. Instead, EPA could consider using categorical grants with specific requirements and restrictions to ensure that the funds are used solely for addressing the cleanup needs and preventing future environmental damage.