Question

TRUE or FALSE. Since education yields private returns, which are fully captured by the person who makes the investment, the market will provide the optimal level of education and the government should not intervene. ii) TRUE or FALSE. Public goods can be provided privately. iii) TRUE or FALSE. There is a basic trade-off between efficiency and equity because an efficient outcome may not necessarily be fair. iv) TRUE or FALSE. The adverse selection phenomenon of market failure is about the actions that agents take in response to certain incentives.

v) TRUE or FALSE. A tax system should be designed to minimize excess burden.

vi) TRUE or FALSE. Failure to declare economic activity for tax purposes is a typical case of tax avoidance. vii) TRUE or FALSE. Every increase in government spending must ultimately be financed by an increase in tax. viii) TRUE or FALSE. Floating debt is debt in which the principal amount is repaid by the government after a predetermined period of time but interest is paid regularly.

ix) TRUE or FALSE. One advantage of Zero base budgeting is that it integrates planning and decision making hence leading to a simplification of the entire management system.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ x) TRUE or FALSE. Audit control is an important aspect in the control of public expenditure. ​ ​ ​ ​ ​ ​ ​ ​ ​ xi) TRUE or FALSE. Transfer expenditure relates to the expenditures against which there is a corresponding return. ​ ​ ​ ​ ​ ​ ​ xii) TRUE or FALSE. Mineral royalty tax is an example of an indirect tax. ​ xiii) TRUE or FALSE. The user fees paid by a patient who seeks medical attention at a health facility do not have quid pro quo. ​ ​ ​ ​ ​ xiv) TRUE or FALSE. Privatization and deregulation are forms of decentralization.   

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ xv) TRUE or FALSE. A decentralized system has the advantage of fostering intergovernmental competition. ​ ​ ​ ​

Answer 1

(i) The statement is False. Education has both private and social returns. The social benefits of education include enhanced employment oppurtunity and incomes, improved social skills, status and networks etc. Hence education has positive externality. If government does not intervene then a lesser number of people will be educated acoording to the marginal private benefits. When marginal social benefit would be considered, a higher number of people will be educated in the social optimum. Hence government intervention is important so that the externality can be internalized and more people get educated.

(ii) False. Public goods cannot be provided by a private entity. A private entity will seek profits. As is the nature of public goods, there is no scope for profits. Hence government must provide public goods by taking into consideration the marginal social benefits.

(iii) The statement is true and is related to one of the basic principles of economics. To understand why this is true, consider the e.g. of taxation. If every individual of an economy were taxed the same regardless of their incomes, this may be a simple and efficient way but is not equitable. Equity here would mean that individuals who value economic resources highly (generally high income people) should be ones to pay more taxes. This way there will be less burden (or even no burdens) on people with low incomes (or extremely low incomes). From this example we can see that trade offs always exist in our world.

(iv) This stattement is true. Adverse selection occurs due to asymmetric information in the market. This means one party (generally the seller) has more information about the product than the buyer. This incentivizes the seller to charge a higher market price for his product and earn higher profits. Another e.g would be for insurances where people working in hazardous conditions (like risking) buy insurances. Here buyers have more information. There knowledge of high risk to their lifes incentivezes them to buy insurances. Hence statement is true.

(A maximum of 4 four sub-parts can be answered)