The Canada Education Savings Grant gives parents a grant of 20 cents for every d

Question

The Canada Education Savings Grant gives parents a grant of 20 cents for every dollar they save for their children’s education, up to a maximum of $2,000 in savings/$400 in grant. Some parents save more than others, and the average CESG per Canadian child is approximately $100.

a. Show that a $100 per child block grant makes parents better off than a matching grant that costs the government $100 per child.

b. What are the advantages and disadvantages of replacing the current matching grant program with a block grant?

Explanation / Answer

In this problem, Canadian Education Savings Grant (CESG) allows some grant on money saved by them for children education. It induces parents to save for this purpose. At present, grant is 20 cents per dollar saved (i.e. 20% of money saved for education. Maximum grant is $400. In order to get it a person has to save $2,000 or more. Some parents are saving such amount. However most of the parents are poor and can save very little. As a result, average grant per parent is $100. So average savings is $500. Thus most of the parents are saving below $500.

Due to this variation, rich parents are enjoying maximum of the grant that CEGS is offering in a period. A very small portion is passed to poor parents. It is serving basic purpose of the grant policy. Objective of this policy is to help parents to accumulate a reasonable sum of money so that childrens needs for education can be met. But the existing system is a failure in this respect. It is making affluent parents more rich. Poor parents are hardly getting its benefit. So disparity in the country

In order to remove this disparity, block grant can be suggested. Under this scheme a constant amount of $100 is granted to each child irrespective of the amount spent. Thus a rich parent capable of saving $2,000 and a parent saving less than $100 both will get grant of $100. So poor parents will be immensly beefitted from it. Basic objective of such grant will be fulfilled. Total welfare to the economy will be maximzed.

Thus $100 per child block grant will be better than existing scheme.

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Advantages of block grants are;

1. Grant amount are equally distributed among the society. So all children will be benefitted from it.

2. Marginal utility of each dollar grant differes from one parent to other. MU of a dollar to poor parent is very high since their savings are too inadequate to provide proper education to their child. A rich parent has comparatively low MU. So scheme will be successful in maximizing welfare of the society.

3. It will help in lowering the gap between rich and poor.

4. Society will be better off as the scheme will allow every child to get a reasonable standard of education. It will improve productivity and effeciency of future labor force. Thus national income will grow. Society will be better off. Standard of living of the people will improve.

Limitations:

1. It will not induce a parent to save more for their children education.It is due to not linking up of grant with amount saved. Thus propensity to save will not improve. In other words coutry will not be able to generate adequate savings as required for imparting proper educatio.

2. Many parents will not save as they kow that their child will get $100 which will be used for education. Instead of savings money for education they may prefer to spend the moey on unhealthy and luxury items. So welfare of the society will be adversly affected.

Advantages of block grant is limitations of current scheme and vice versa. However comparative analysis will reveal that advantages of block grant is much more than its limitations. Hence society has to go for block scheme. Sometimes these two schemes can be combined to get best possible results.

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