Suppose that a world government introduces a subsidy s for environmental investments: for each unit of resources allocated to environmental investments by a country, the world-government gives the country s < 1 resource units as a subsidy. The subsidy is financed by a resource tax on the other country. For example, if Canada allocates 25 resource units to environmental investments, the world-government collects 25 x s units from the ROTW country to give those 25 x s units of resources to Canada as a subsidy for its environmental investments. Assume that
ROTW and Canada have symmetric resource constraints both before and after the subsidy.
Canada's utility function is U (G1 + G2; C1) = (G1 + G2) C1
ROWT's utility function is U (G1 + G2; C2) = (G1 + G2) C2
Suppose that before the resource subsidy scheme Canada's resource constraint is
C1 + G1 = 100:
Is Canada's resource constraint
(Pick one answer from the choices)
a) C1 + G1 = 100
b) C1 + G1 = 100 + sG1
c) C1 + G1 = 100 sG2
d) C1 + G1 = 100 + sG1 sG2
after the subsidy scheme is introduced by the world-government? Explain .