Public balance is known as public sector economics or public economics focus on the taxing and spending activities of government and their influence on the allocation of resources and distribution of income. Public finance is the study of the role of the government in the economy. It is the branch of economics which evaluate the government revenue and government expenditure of the public authorities and the modification of one or the other to achieve desirable effects and avoid undesirable ones.
Subject Matter of Public finance Subject matter of public finance is: 1 . Public expenditure: Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc 2. Public revenue: Public Revenue is the income realized by the government for purposes of financing public administration. Public revenue may be realized from taxation of the various entitles and activities wealth the country or from non-tax sources such as revenue from government-owned corporations, public wealth funds, grants etc. 3.
Public debt: Public debt refers to the amount of money payable by a central government. The operations of a government are normally financed through public debt. Another term for public debt is government debt. 4. Financial administration: Financial Administration involves all the activities of finance and taxation. Includes central group for accounting, auditing, and budgeting; the supervision of local government finances; tax administration; collection, custody, and disbursement of funds; administration of employee-retirement systems: debt and investment administration; and the like.
So, in simple words Financial Administration is an all surrounding term for all those functions /operations having the objective to sake funds and finance available to the government for its duties and responsibilities to be carried out smoothly and also all those activities that ensure the lawful and efficient use of those funds/balance. What should be the government activities according to the economist Richard Engrave?
The economy was proposed by Richard Engrave, who suggested that government activities could usefully be thought of as having effects on: “(1) efficient allocation of resources, (2) Distribution of income, and (3) Macroeconomic stabilization The first two functions are usually beyond the control of the state or local overspent and are managed at the national level of government. The third function, allocation, is the basic concern of the local government. The allocation function can be defined in simple words as the provision of socially desirable public goods. The public goods experience two problems.
First, It may be impossible to exclude a person from using any service and secondly, too many people may use the service public and is usually financed with taxes. If one or the other characteristic is present, then it may be financed by a quasi price or user charge. Do you think national defense is public good? Show your argument. Yes, defense is pure public good. Public goods are, as defined by economists, non-rival, meaning that the cost of an additional person using the good is zero, and non-clubbable, meaning that it is technologically impossible, or prohibitively costly, to prevent people from enjoying the goods.
National defense is frequently name as the model example of a pure public good. Pure public good is one which is 1) Non-rivalry in nature I. E. Consumption of this good will not reduce the quantity available for others. All the consumers will consume the same quantity of pure public good. 2) Non- exclusion principle I. . Nobody can be excluded from its consumption whether or not they pay for it. Public goods create positive externalities I. E. Many people will derive benefits from it even if they don’t pay. And rationally self interested people will not pay for that they can get without paying for it.
So defense is public good because it is both Non-rivalry and Non-exclusion in nature. What criteria should be used for the right mix of public and private provision? Prevarication means taking services that are supplied by the government and turning over to the private sector for provision and/or production. What is the right ix of public and private provision? What criteria used to select inputs? – There are several considerations: 1 . Relative wage and materials costs: the less expensive sector is preferred on efficiency grounds. 2.
Administrative costs: under public provision, fixed administrative costs are spread over a large group of people. 3. Diversity of Tastes: with diversity, private provision is more efficient because consumption can be fitted into tastes. 4. Distributional issues: community’s notion of fairness requires the availability of some goods to everyone. Briefly describe the elements of cost -benefit analysis. Definition Set of procedures for guiding public expenditure decisions Elements of cost -benefit analysis 1 . Concept of Prevent Value a. Rational decisions require comparing costs and benefits in different time periods b.
Doing this requires use off Discount Rate or a Premium Rate c. Discount rate is the rate at which you will trade future money for present money d. Premium rate is rate at which you will trade present money for future money e. Generally assume the two rates are the same Inflation – it. Relative positions unchanged Need to use all real or all nominal figures iii. ‘v. Internal Rate of Return Criteria . IR is discount rate that makes the Poof project zero 2. Undertake project if the IR > Interest rate on capital for the project 3. Benefit Cost Ratio a. Problem classifying things as benefits or costs b. Taxes I.
If good is subject to taxes such as sales tax, price paid by consumers differs from price received by seller it. Make same adjustment as in case of monopoly power Describe the Nature of externalities. Economists generally define an externalities as “a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. The cost of an externalities is a negative externalities, or external cost, while the benefit of an externalities is a positive externalities, or external benefit. ” Natures of externalities are: 1. An indirect cost, not seen on final price tag of costs and benefits. X; resulting air pollution or water pollution 2. Externalities can be positive. Ex- price of the vaccination. 3. Public goods can be viewed as a special kind of externalities. How does government can create market for negative externalities? Government can play a role in reducing negative externalities by taxing goods when their production generates spillover costs. This taxation effectively increases the cost of producing such goods. The higher cost, then, better reflects the true cost of production because it includes the spillover costs of, say, pollution. So, such taxation attempts to make the producer pay for the full cost of production.
The use of such a tax is called internalizing the externalities. For example, let’s assume the cost of producing the widgets noted earlier is two dollars per unit, but an additional 20 cents per unit had been shifted to society as a negative externalities in the form of dirty air. The government could place a 20 cent tax on each widget produced to ensure that the rim pays the actual cost of production-which is now two dollars and twenty cents, including the cost of the negative externalities. As a result of the higher cost of production, the firm will reduce its production of widgets thus reducing the level of pollution.
Distinguish between Parent optimality and social optimality: 1 . Parent optimality is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. The socially optimal is said to exist when resource are allocation of resources not only represents Parent optimality but also represent the high level of social welfare. 2. In Parent optimality no production of commodity can be increased without decreasing production of another commodity. But in socially optimal production of commodity should be increase without decreasing production of another commodity. . In real world Parent optimality is practices but socially optimal quit impossible to practice. Are things like only having one group of product procurers for the chain store compared to many buyers doing similar Jobs for a series of independent stores or having a centralized supply chain. The global efficiencies of having a single standardized all encompassing bureaucratic procedures for a given service often completely trumps these local inefficiencies. For example, one can compare the provision of health insurance in the Canadian versus American models.
Condition leads to global efficiency: Global efficiency allows wealthy countries to use their resources – whether labor, technology or capital – more efficiently. Because countries are able with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than there countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. Let’s take a simple example. Country A and Country B both produce cotton sweaters and wine.
Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 waters and three hours to produce six bottles of wine (total of four hours). Explain the primly determination of economic growth Economic growth is an increase in real GAP. It means an increase in the value of goods and services produced in an economy.
The rate of economic growth measures the annual percentage increase in real GAP. There are several factors affecting economic growth, but it is helpful to split them up into: Interest Rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage aments so more disposable income to spend. However, recently we had a period of zero interest rates, but due to low confidence and reluctant banks growth was still sluggish. Consumer Confidence. Consumer and business confidence is very important for determining economic growth.
If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending. Asset Prices. Rising house prices create a positive wealth effect. People can remarriage against the rising value of their home and this encourages more consumers spending. House prices are an important factor in the I-J, because so many people are homeowners. Real Wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes.
In this situation, consumers will have to cut back on spending reducing their purchase of luxury items. Value of Exchange Rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. Depreciation could cause inflation, but in the short term at least it can provide a cost to growth. Banking Sector. The 2008 Credit crunch showed how influential the money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment. Levels of infrastructure.
Investment in roads, transport and communication can help firms reduce costs and expand production. Without necessary infrastructure it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some unemployed economies. Human Capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labor productivity can help firms take on more sophisticated production processes and become more efficient. Development of Technology.
In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth. Other Factors that Can Affect Growth in the Short Term. Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a shock to growth. It causes SARA to shift to the left leading to higher inflation and lower growth. Political Instability. Political instability can provide a negative shock to growth. Weather. The exceptionally cold December in UK 2010, led to a shock fall in GAP part-B Illustrate the derivation of demand curve for public goods.
How can public good efficiency nee achieved? The derivation of demand curve for public goods The only way you can derive a market demand curve for public goods is through a survey of the public about how much they would be willing to pay for different quantities of a public good. However, problems such as free-riding and social-loafing make it very difficult, and your estimations will turn out to be biased because most people will have an incentive to hide truly how much they are willing to pay for a public good because they want to be able to enjoy the good for free at someone else’s expense.
But if you ignore these caveats, You Just take different quantities, and sum the price levels that everyone is willing to pay. For example, at a quantity of 5, lets say person A will pay 3, person B will pay 1, and Person C will pay 5, then the market price at quantity 5 will be 9. This process would need to be repeated for all different quantities until you have a completed demand How can public good efficiency achieved? The best place to begin this analysis of public goods efficiency is with the demand for public goods. Because public goods are nontrivial in consumption, everyone can benefit at the same time.
As such, the demand for a public good is found by summing the price that each person is willing to pay for a given quantity. In contrast, the demand for private goods is found by summing the quantity that each person is willing to buy at a given price. Public good demand is the vertical summation of individual demand curves and private good demand is the horizontal summation of individual demand curves. For example: The two people are the cantankerous Roland Nottingham and generally mundane Duncan Truly. Reload’s demand for the good is represented by the top demand curve.
Dunce’s demand for the good is represented by the lower demand curve. Roland benefits more from the Shady Valley Municipal Park than does Duncan. In terms of simple equations, public good efficiency is achieved with: Marginal Cost Reload’s Price Dunce’s Price Efficient Production Fortunately there is an intersection and an analysis of the efficient production of park benches can be informative. The question is: How many park benches should the Shady Valley government produce? Efficiency dictates that the value of the good produced equal the value of goods not produced, which is the opportunity cost.
This is achieved at the intersection of the public good demand curve and the marginal cost curve. Click the [Efficiency] button to highlight this point. In this example, efficiency is achieved if the Shady Valley Municipal Park has 2 park benches per acre. The total value provided by this efficiency level of production is $2 per bench. What is free ride problem? How can u solve the free ride problem or inefficiency problem in public goods? A free rider, in economics, refers to someone who benefits from resources, goods, or services without paying for the cost of the benefit.
In economics, the free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource. Example: A commonly used example of the economic notion of the free rider problem is found in national defense. All citizens of a country benefit from being defended; however, individuals who avoid taxes are still protected by the same common resource of national offense, even though they did not pay for their fair share of the resource.
Solutions to Free Rider Problem 1. Tax. One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defense costs EWE bin. This results in higher taxes for I-J taxpayers. Therefore the cost of national defense is paid indirectly by I-J cost. Some may dislike this approach e. G. Some anti-war protesters have tried to withhold a certain % of their tax arguing they don’t want to make contributions to illegal wars. But, most people accept paying taxes. 2. Appealing to People’s Altruism.
For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will be probably be many free riders’ who don’t make donation. But, enough people may be willing to make a donation to fund the cost of the garden / museum. This solution is only effective for services which have relatively low cost. People don’t mind paying E if other’s free ride. But, if there was a voluntary donation of II,OHO for national defense, would anyone pay it? 3. Make a Public Good private. A beautiful garden could be seen as a public good.
However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good. 4. Legislation To deal with the free rider problem associated with overcompensation of common resources. The government have tried various options such as: Quotes – difficult to implement and difficult to monitor Legislation – on size of net size, number of fishing vessels Compensation to move away from fishing. Explain the rationale of government income redistribution. Different kinds of social welfare functions Utilitarian ; Maxing criterion (Rawlins)
Parent efficient ; Non-individualistic We have income to provide an incentive for productive (mutually beneficial) exchanges within the economy. People gain purchasing power through labor, and it provides them with incentives to work. If we redistribute income, we diminish that incentive, but only very gradually unless the marginal tax rate is very high. Redistributing income, while it only has slight costs, has great benefits. The benefits come from the diminishing marginal utility of money. That is, the same amount of additional money is worth more to people who start off with less money.
For example, money who already has a BMW and Mercedes has little interest in a Ford Escort, but someone else who walks for an hour to work and home every day, the car is a valuable purchase indeed. Since money has diminishing marginal utility, we should take money from the rich and give it to the poor, so long as it doesn’t reduce the incentive to work too much. The big question is, what is too much? This, however, is a relatively minor question compared to whether or not to redistribute income at all, and is best answered through experimentation. Food subsidiary or cash subsidiary which one is better?
Explain with example (use elevate graph if require) It is very difficult to determine which subsidiary is better, because food is basic need on the other hand money is need for all people. But in our country there are so many rich people who really don’t deserve this entire subsidiary. So from my point of view food is better than money as a subsidiary. A of subsidies are most common in unemployed countries where Governments subsidies such things as food, water, electricity and education on the basis that no matter how poor, all should be allowed those most basic requirements.
Government can create exactly the same outcome through selective tax breaks as through cash moment. For example, suppose a government sends monetary assistance that reimburses 15% of all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is achieved by giving a health tax deduction. Tax subsidies are also known as tax expenditures. Tax subsidies are one of the main reasons for why the tax code is so complicated. Explain different types of tax base with examples. Benjamin Franklin once said, “Nothing is certain but death and taxes. Here are the 7 types of taxes base:-. Taxes Paid by the Individual 1 . Income Taxes: These taxes are paid out by anyone who earns an income by any means. Income taxes are subject to deductions and tax credits; they are usually not paid by people under a certain income or who have special situations such as a disability. 2. Property Taxes: These are paid by anyone who owns property such as land, a home or commercial real estate. These taxes are often collected by the state and county to help fund their budgets. Licensing fees on cars, recreational vehicles and watercraft are property taxes as well. . Consumptive Taxes: These are taxes on sales goods or items that are subjected to being used by either an individual or business. While everyone understands that a small amount of money is added on to the purchase of goods in the stores, many people overlook other taxes. Fishing or hunting license is a tax. Toll road fees are a tax, even if they call it a user fee. So are travel fees. Taxes Paid by Businesses 4. Corporate Taxes: All business structures pay taxes on the income made in that particular business. Tax consequences are important when structuring a business.
For example, sole proprietorships will pay their taxes through their regular income taxes, 5. Payroll Taxes: These taxes are taken out by the businesses before income is strutted to the individual in exchange for the work that was done. This is an additional cost of having an employee, and one reason why “independent contractors” have become so popular. These payroll taxes must be paid by the individual contractor if the regular business is not paying them. 0 Other Types 6. Capital Gains taxes are paid on investments that have appreciated. Frequently these investments have been sold.
Examples would be stocks, bonds, and real estate. Most losses can be “written off on the federal income tax level, and like corporate taxes, these are usually best handled by professional tax preparers. . Inheritance or Estate Taxes: Of the 7 types of taxes, this is the only type where a tax can happen because of a death. A certain amount of estate money that may be passed on with no tax consequence. Once that level is met, however, the taxes are usually quite steep. Life insurance is often used to offset inheritance taxes, and is one reason insurance is so critical in estate planning.
What do you mean by incidence of taxation? Explain with graph the income effect and economic term for the division of a tax burden between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax. For example, the demand for cigarettes is fairly inelastic, which means that despite changes in price, the demand for cigarettes will remain relatively constant.
Let’s imagine the government decided to impose an increased tax on cigarettes. In this case, the producers may increase the sale price by the full amount of the tax. If consumers still purchased cigarettes in the same amount after the increase in price, it would be said that the ax incidence fell entirely on the buyers. Income effect and substitution effect of income tax and consumption tax. Substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
For example, if private universities increase their tuition by 10% and public universities increase their tuition by only 2%, then it is very likely that we would see a shift in attendance from private to public universities. The change of relative prices is the substitution effect (steep line to dotted line) and the change of purchasing power is the income effect (dotted line to parallel solid line) The income effect is the change in consumption patterns due to the change in purchasing power. This can occur from income increases, price changes, or even currency fluctuations. Since income is not a good in and of it.
For example, a decrease in the price of all cars allows you to buy either a cheaper car or a better car for the same price, thus increasing your utility. Goods typically fall into one of two categories: normal and inferior. These categorization relate consumption off good with a particular individual’s income. Normal goods increase in consumption as income increase while inferior goods decrease as income increases. Also, some goods can be normal or inferior only on certain ranges of an income spectrum. For example, education is a normal good: as one’s income increases (family income), demand for education increases.
Is it possible to provide public goods by private enterprise? Give your Justification. No, it is almost impossible to provide public goods by private enterprise A public good is a good that is both non-clubbable and non-rivalries in those individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. Examples of public goods include fresh air, knowledge, guesthouses, national defense, flood control systems and street lighting. Public goods that are available everywhere are sometimes referred to as global public goods.
A private good is the opposite of a public good. Examples of private goods include food, airplane rides and cell phones. Private goods are less likely to experience the free rider problem because a private good has to be purchased – it is not readily available for free. A company’s goal in producing a private good is to make a profit. Without the incentive created by revenue, a company is unlikely to want to produce the good. Other than that for manufacture public goods it needs huge money which is quit impossible for a private sector to finance.
Other hand if defense or police goes to almost impossible to provide public goods by private enterprise Briefly explain the income distribution as an externalities. Negative externalities: The Income distribution can decrease the supply of a good that produces negative externalities by placing a tax on that good. This increases production costs and discourages production. The government can also restrict output of the good using some method of direct control, such as passing legislation capping how many of that DOD can be sold. This hurts society more than private companies; part of the reason we outsource a lot of production to china.
Positive externalities: Let’s take the example of vaccines, to get production up to the necessary point, the Income distribution can increase the supply of vaccines by subsidizing production. This decreases production costs and encourages producers to make more of their good. It can also increase the demand by requiring vaccines for children to attend public schools. What are the factors determined the actual level of real capital formation without full employment situation. Capital as a factor that affecting economic growth and employment situation.
The factors that determined the actual level of real capital formation without full employment situation are:- The low level of capital formation in unemployed countries is caused by low saving ability. Low saving ability is caused by low income levels. Low levels of income caused by low productivity. The low level of productivity will lead to low incomes and low investment. Low level of investment due to the ability of low capital formation. The world economy experts agreed that in the process of economic development in unemployed countries should e able to beat large enough to crack the vicious circle of poverty.
One way that can be done to achieve that goal is by the formation and development of investment and workforce skills development so as to increase productivity and ultimately their incomes will increase. Without being able to do capital formation and investment, economic growth in unemployed countries will remain behind. During the full employment situation, how capital formation is effected by the tax. Capital as a factor that affecting economic growth and employment situation and also tax.
During the full employment situation, capital formation is effected by the tax such as: The high level of capital formation in employed countries is caused by high saving ability so tax is increase high saving ability is caused by I high income levels increase tax revenue High levels of income caused by high productivity. Increase corporate tax revenue The high level of productivity will lead to high incomes and high investment. Increase corporate tax revenue high level of investment due to the ability of high capital formation increase corporate tax revenue
