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Public Economics Questions and Answers

1.

A good which is characterized by both rivalry and excludability is called as:

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

A good is rival when one person's use of it reduces what is available to others, and excludable when others can be kept from using it unless they pay. A private good, such as bread or a shirt, has both properties. A public good is non rival and non excludable, a merit good is one that the government considers worthy of encouraging whether or not it is rival, and a normal good is simply one whose demand rises with income. The answer is a private good, option B.

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2.

A large part of fiscal deficit in India is financed by:

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

India's fiscal deficit is financed mainly by borrowing from the market, that is by the sale of government securities (dated securities and treasury bills) to banks, insurance companies and other investors, with smaller amounts raised through small savings, provident funds and external debt. External debt is a small part of the financing, so it is not the large part. The key gives market borrowings, option B. Small savings, state provident funds and external debt are real sources of financing too, but each is a much smaller share than the sale of government securities.

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3.

The public policies which are meant for specific segments of the society are known as:

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

Public policies that benefit particular segments of society, such as farmers, the poor or small firms, by giving goods, services or subsidies to them are called distributive policies, as in the classification of Lowi. Redistributive policies shift resources from one group to another, as with progressive taxation, and regulatory policies set rules of conduct. Capitalization is not a type in this scheme. The key gives distributive, option B. Distributive policies are contrasted with regulatory policies, which restrict behaviour, and redistributive policies, which move resources between classes.

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4.

When there are negative externalities:

Exam Year(s)

DSSSB PGT - 2023,

Answer: A

A negative externality is a cost imposed on third parties who are not part of the transaction, so the marginal social cost is the private marginal cost of the producer plus the external cost. This makes the marginal social cost higher than the marginal (private) cost. If it were lower or equal, there would be no negative externality, and a marginal social benefit equal to marginal cost describes the efficient outcome. The answer is option A. The gap between the two is the external cost, and it is why a tax equal to that gap can restore efficiency, as Pigou argued.

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5.

The Annual Financial Statement or the main budget document consist of the following except:

Exam Year(s)

DSSSB PGT - 2023,

Answer: A

The Annual Financial Statement of the Union Government under Article 112 shows the receipts and expenditure of the Consolidated Fund of India and of the Public Account. The Contingency Fund is mentioned in the budget documents too, but the Deposit and Advance Fund is not a separate item of the statement as the setter has it, being part of the Public Account in other classifications. The key gives the deposit and advance fund as the exception, option A.

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6.

______ as a percentage of GDP has the largest share in the revenue expenditure of Union government in 2021-22.

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

In the revenue expenditure of the Union government in 2021-22, interest payments formed the largest single share of GDP among the items listed, about 3.4 to 3.6 per cent of GDP, ahead of subsidies, defence and pensions. Interest payments are the cost of the debt the government has built up, and they are the biggest item of the revenue expenditure. The explanation follows the key, option B, and the exact percentages were not checked. The share of interest payments is large because the stock of public debt built up over years has to be serviced every year.

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7.

The levying of taxes is which function of the budget?

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

The levying of taxes is a function of the budget that serves redistribution: progressive taxes take more from the rich and spending on the poor gives them more, so the budget alters the distribution of income. Stabilisation concerns the control of inflation and unemployment, and growth concerns raising output. The key gives redistribution, option B. The other functions are the expenditure side, which deals with allocation and stabilisation.

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8.

The production of a good results in positive externalities. The government should:

Exam Year(s)

DSSSB PGT - 2023,

Answer: A

When production gives a positive externality, the social benefit exceeds the private benefit and the market produces too little. The government should give the producer a subsidy equal to the marginal external benefit, so as to raise output to the social optimum. A tax would reduce output further, and the cost of an externality is not what a subsidy reflects. The key gives option A. The subsidy raises the output of the producer to the level where the marginal social benefit equals the marginal social cost.

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9.

Who suggested imposition of a tax, known today as corrective tax to tackle negative externalities?

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

A tax to correct a negative externality is known as a Pigouvian tax after Arthur Pigou, who proposed it in The Economics of Welfare (1920). Ronald Coase argued for bargaining over property rights, Akerlof wrote on asymmetric information (the market for lemons) and Pareto gave the criterion of efficiency. The answer is Arthur Pigou, option D. The Pigouvian tax is set equal to the marginal external cost, so that the producer faces the full social cost.

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10.

Which of the following cannot be classified as a revenue receipt of the government?

Exam Year(s)

DSSSB PGT - 2023,

Answer: C

A revenue receipt neither creates a liability nor reduces an asset of the government. Interest on loans, tax receipts and profits of public sector undertakings are revenue receipts. Disinvestment, the sale of the government's shares in public enterprises, reduces its assets and is a capital receipt. The answer is disinvestment, option C. Tax receipts and interest and dividends are recurring and do not change the assets or liabilities of the government.

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