YOU WERE LOOKING FOR: Public Finance Final Exam Questions And Answers
This part studies the fundamental principles that govern the flow of Government funds into various streams. Public Debt: In this section of public finance, we study the problem of raising loans. Public authority or any Government can raise income...
As the economic and social responsibilities of the state are increasing day by day, the methods and techniques of raising public income, public expenditure and public borrowings are also changing. In view of the changed circumstances, it has given...
Much of public finance has political science aspects. According to Dr. Public finance has given shape to the nature of public finance as it has given to anything else. History puts up the lessons of the past before us in the sphere of public finance as it is in any other sphere. No finance policy can be formulated without keeping in view the historical development. History provides us with facts, figures and illustrations which is essential for the formulation of any finance policy.
D Public Finance and Sociology: Social reforms which form the part of sociology, are now supposed to be the responsibility of the state and they need government finance for execution. In fact, these social reforms have enhanced the scope of public expenditure. For example, crimes are the topics which sociologist studies, but are the student of public finance who studies the raising of revenue from criminals of one kind or the other. Taxes on inheritance, gifts etc. In this way sociology is very much related to public finance.
E Public Finance versus Law: The fiscal policy of a country, in general, is always based on the principles of equity and justice. All these terms have been borrowed from jurisprudence and in fact are based on the foundation of legal definitions. The law of the country is the basis on which taxes are imposed and funds are allocated. There are laws which prevent improper raising of funds and their improper allocations. F Public Finance and Ethics: There is also a close relationship between public finance and ethics. Equity and justice have as much to do with ethics as they have with law and therefore the relationship between public finance and ethics is obvious, if the fiscal policies are to be based on these principles. For instance, it is neither legal nor ethical to snatch Rs. G Public Finance and Psychology: Public finance is also related with psychology. Public finance deals with people and as such most of its problems are human problems and hence depend upon human behaviour which is the subject-matter of psychology.
For example, take the case of taxation on company profits. From the above study, it is clear that public finance is related to many of the social sciences which deal with different aspects of human behaviour. State its practical problems. Just like an individual seeks to maximize his satisfaction or welfare by the use of his resources, the state ought to maximize social advantage or benefit from the resources at its command.
The principles of maximum social advantage are applied to determine whether the tax or the expenditure has proved to be of the optimum benefit. Hence, the principle is called the principle of public finance. Pigou has called it the principle of maximum aggregate welfare. Public expenditure creates utility for those people on whom the amount is spent. When the volume of expenditure is small with a slighter increase in it, the additional utility is very high. As the total public expenditure goes on increasing in course of time, the law of diminishing marginal utility operates. People derive less of satisfaction from additional unit of public expenditure as the government spends more and more.
That is, after a stage, every increase in public expenditure creates less and less benefit for the people. Taxation, on the other hand, imposes burden on the people. So, when the volume of taxation becomes high, every further increase in taxation increases the burden of it more and more. People under go greater scarifies for every additional unit of taxation. The State should balance the social burden of taxation and social benefits of Public expenditure in order to have maximum social advantage. Attainment of maximum social advantage requires that; a Both public expenditure and taxation should be carried out up to certain limits and no more. Assumptions of this theory: 1. All taxes result in sacrifice and all public expenditures lead to benefit.
Public revenue consists of only taxes and there is no other source of income to the government. The govt. Diagrammatical Explanation of the theory of maximum social advantages In the above diagram, MSS is the marginal social sacrifice curve sloping upward from left to right. This rising curve indicates that the marginal social sacrifice goes on increasing with every additional dose of taxation. MSB is the marginal social benefit curve sloping downwards from the left to right. This falling curve indicates that the marginal social benefit diminishes with every additional dose of public expenditure. PM represent both marginal social sacrifice as well as marginal social benefit. Both are equal at OM which represents the maximum social advantage. Criticism of the theory of Maximum Social Advantages 1. Non measurability of social sacrifice and social benefit: The major drawback of this principle is that it is not possible in actual practice to measure the MSS and MSB involved in the fiscal operation of the state.
Non applicability of the low of equimarginal utility in public expenditure: The low of equimarginal utility may be applicable to private expenditure but certainly not to public expenditure. Neglect non-tax revenue: The principle says that the entire public expenditure is financed by taxation. But, in practice, a significant portion of public expenditure is also financed by other sources like public borrowing, profits from public sector enterprises, imposition of fees, penalties etc.
Lack of divisibility: The marginal benefit from public expenditure and marginal sacrifice from taxation can be equated only when public expenditure and taxation are divided into smaller units. But this is not possible practically. Assumption of static condition: Conditions in an economy are not static and are continuously changing.
What might be considered as the point of maximum social advantage under some conditions may not be so under some other. Misuse of government funds: The principle of Maximum social advantage is based on the assumption that the government funds are utilized in the most effective manner to generate marginal social benefit. However, quite often a large share of government funds is misused for unproductive purposes 7. Briefly analyze the various instruments of financial administration. Thus the focuses on the procedure which ensure the lawful use of public funds.
However the concept has been differently defined as under: Prof. The main ingredients are budgeting, accounting, auditing and purchase and supply. According to Prof. No tax or expenditure can be made without the permission of the executive. It is therefore, the responsibility of the executive to prepare the budget which is stupendous task. In Parliamentary Government, there is a principle that no demands for grants can be made except on recommendation of the executive. It is therefore In India; executive refers to the Central Government. Since, Finance Ministry is responsible for the administration of the finance of the Central Government, even then it performs the policy making function and tries its best to get the final approval of the legislature. In democratic parliamentary system, it is the legislature or parliament which is the time representation of the people.
In India, under the constitution there is special provision to control the finances: 1. Controller over Taxation. Indian constitution under Article provides that no tax shall be levied or collected except the permission of law. Thus, The Government has to present all tax proposals before parliament in the form of a Bill to be passed into law and unless no art is passed, no tax can be levied.
Positive economics a does not depend on market interactions. The Coase theorem has problems because a generally, bargaining costs are not zero. The marginal rate of substitution is a the slope of the Pareto curve. The slope of the production possibilities curve is the a marginal rate of substitution. The First Fundamental Theorem of Welfare Economics requires a producers and consumers to be price takers. The economic incidence of a unit tax is a generally borne by the buyers. Market failure can occur when a monopoly power exists in the market.
A public good is a a good that the public must pay for. Movement from an inefficient allocation to an efficient allocation in the Edgeworth Box will a increase the utility of all individuals. Points on the utility possibility frontier are a inefficient. The economic theory of optimal health care provision says that a It is socially optimal for free medical treatment to be provided to everyone b Everyone should pay their own medical expenses because they will set marginal cost equal to marginal benefit. Public goods can be a provided privately. Externalities can be positive because a marginal damages do not last over time. A Pigouvian subsidy a cannot exist with externalities. Which method can help in obtaining a welfare improvement if externalites exist? Marginal damages a must always be considered in social marginal costs. In a public goods context, it is difficult to measure impact on real income because a public goods are generally free to the public.
Social insurance can be justified on the grounds of a adverse selection. Statutory incidence of a tax deals with a the amount of revenue left over after taxes. An ad valorem tax is a given as a proportion of the price. Lump sum taxes a create no excess burden. If the proceeds from a Pigouvian tax are used to income tax rates, then efficiency in both markets.
This is the definition of a the benefits-received principle. Explain why a person s decision of whether to get a flu shot causes an externality. Discuss how the size of the externality caused by any single individual s decision depends on the fraction of other individuals who also get vaccinated. Discuss whether subsidizing flu shots by making them available for free might be an optimal policy. For the explain part, see the first hour exam. The size of the externality depends on the fraction of others getting vaccinated because if everyone else is immune, my decision not to get vaccinated will probably not matter to others, while if nobody else is vaccinated, then if I don t get vaccinated then get sick, the disease might spread widely.
A Pigouvian subsidy is an optimal response to a situation where there are positive externalities. It is possible that the optimal Pigouvian subsidy in this case would be to subsidize the entire price of the flu shot, so that flu shots would be free; it is also possible that the optimal subsidy would be more or less than the price of the flu shot. Explain how you would define the term more progressive in relation to this definition of P.
Calculate the index of progressivity. Calculate the index of progressivity again; is this a progressive tax cut using this index? In light of this point, discuss the claim made by Greg Mankiw in his lecture last week that the Bush tax cuts have been progressive because the proportion of total income taxes paid by high-income taxpayers has actually risen in recent years. But note that after the tax cut, the rich person pays percent of the taxes. Before the tax cut, the poor person was paying a little bit of taxes, so the rich person was paying less than percent of all taxes paid.
So the tax cut increases the proportion of taxes paid by high-income households in this economy, even though it does not satisfy the definition of a progressive change in the tax code discussed in class. The relationship to the Mankiw quote is obvious: The statistic he cites does not correspond to the measure of progressivity P. One criticism of globalization is that when import barriers are reduced, some people lose their jobs and are made worse off; in his speech on campus last week, Greg Mankiw advocated Trade Adjustment Assistance TAA programs as a way to reduce the political opposition to free trade. Define TAA programs and explain the economic logic for why they make sense. Your answer should relate to the concept of Pareto improvements. A Pareto improvement occurs when somebody is made better off while nobody is made worse off.
Theory and evidence suggests that while overall income goes up when trade barriers are lifted, with most people winning, there are certainly some people who are made worse off, so simply lifting a trade barrier does not constitute a Pareto improvement. Trade Adjustment Assistance programs provide help to people who have lost their jobs as a result of the elimination of trade barriers; this can involve retraining, moving expenses, or even direct payments like extended unemployment insurance. If a TAA program is generous enough, in principle it can more than compensate the people who lose their jobs as a result of trade opening, and thus the elimination of trade barriers could become a true Pareto improvement. In many beachfront communities on the east coast, it is impossible to buy private homeowners insurance to protect homes against storm damage; insurance companies have found that offering such insurance at a reasonable price that is, a price that is close to the amount of damage that the typical home can be expected to sustain in a storm is unprofitable because the damage sustained by insured homes tends to be greater than the damage sustained by uninsured homes.
They have also found that nobody buys the insurance if they charge a high price. For many years the Federal government has provided some beachfront homeowners with Federal insurance. Discuss whether this is an example of appropriate government intervention to correct a market failure, and if so describe the nature of the market failure. This may be an example of market failure caused by either moral hazard or adverse selection or both. Recall that moral hazard occurs when people who have insurance against a risk behave differently than they would if they had no insurance. For example, in this case it is possible that consumers with insurance would build flimsier houses or would not take any action to protect their homes in storms. There are many things homeowners can do to reduce the likelihood of damage and the amount of damage to their homes. For instance, they can put plywood boards over their windows; they can stack sandbags around the house; and they can move furniture and valuable items off of the ground floor or basement.
It could also be an example of adverse selection if some beachfront homeowners knew that their houses were more likely to be destroyed by storms than other beachfront homes. In this case, the people with houses most likely to be destroyed would buy the insurance, and when the first storm hit the insurance company would discover that the homes it had insured sustained much more damage than the average home or than uninsured homes. This would drive the price of insurance up, and those with houses least likely to be destroyed would be priced out of the market. However, neither of these market failures necessarily implies that the government should get involved. Furthermore, owners of beachfront homes are usually richer than the average household, so government provision of insurance to them constitutes a transfer of resources from the average household to richer households, and so violates the utilitarian goal of transfering money from richer to poorer households.
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