Question

) Describe h0w the government may repay off its debt based on the following methods

Repudiation of debt

Serial bond redemption

Capital levy

2) define and explain the free rider problem

3) using a well labelled diagram explain the principles of maximum social advantage and clearly show how the government determines its optimum tax and expenditure activities

4) the private marginal benefit (PMB)for cassava is given by 30-3x, where x is the number of cassava consumed. private marginal cost(PMC) of producing cassava is the same at 15. For each cassava produced, external cost of 6 is imposed on members of village

without government intervention, how much cassava is produced

what is the efficient level of cassava production?

what is the gain to the society involved in the moving from the inefficient to efficient level of production?

suggest a pigouvian tax that would lead to efficient level of production

how much revenue would the tax raise?

Answer 1

1)

Following are methods to payoff debts:

Repudiation of debt : Here, government refuses to payoff debt to lender. Such examples can be seen in international borrowings. Few Latin American countries have repudiated debt in past.

Serial bond redemption: government issues bonds with different maturity periods. Hence, it helps to maintain balance between the income of government and redemption of bonds.

Capital levy : Capital levy refers to the heavy tax on property and wealth. it helps to collect significant revenue base. significant rise in revenue can be used to payoff debts.

2)

Free rider problem refers to the problem where consumer does not pay for benefits derived from use or consumption of good. It is difficult to estimate true demand for such good and hence market system tends to underproduce such goods.

Public goods suffer from problem of free rider. People do not disclose their true demand for such goods. Hence, market system would underproduce such goods.