Public Economics Questions and Answers

Answer: B

The displacement effect and the concentration effect in public expenditure are due to Alan T. Peacock and Jack Wiseman, who studied public spending in the United Kingdom. They held that in times of crisis such as war the public accept higher taxes, and when the crisis ends the spending does not fall back to its old level, which is the displacement effect, while the activity of the central government then grows, the concentration effect. So the code is 'b', option (B). Pigou, Mehta, Arrow, Samuelson, Prest and Little are not linked with these effects.

Answer: C

The most important theory of increasing public expenditure is Adolph Wagner's hypothesis, the law of increasing state activity: as an economy industrialises and incomes rise, the share of public spending in national income rises. So the code is 'a', option (C). The critical limit hypothesis is a Colin Clark view of the limit to taxation, and the administrative efficiency and stability of income hypotheses are not principal theories of why expenditure grows, so they are not accepted.

Answer: A

Both statements are correct and the reason explains the assertion, so (A) is the key. A pure private good is one that is both rival and excludable: one can be kept from using it unless one pays. Since the producer can exclude non-payers, such goods are sold in the market and are not provided free by the State, which is the point made in the reason. Options (B), (C) and (D) are wrong.

Answer: B

The Finance Commissions had these chairmen in order: K.C. Neogy (the first, 1951), A.K. Chanda (the third, 1960), K. Brahmananda Reddy (the fifth, 1968) and N.K.P. Salve (the seventh, 1977). So the order is a, d, b, c, option (B). The other options place Salve or Brahmananda Reddy before Chanda, which is wrong, since Salve headed the Commission set up in 1977.

Answer: B

The sequence by date of implementation is income tax (a), which dates from 1860, the expenditure tax (b), brought in 1957, the value added tax (c), introduced in India in 2005, and the fringe benefits tax (d), from 2005 as well, so the key is a, b, c, d, option (B). The other options place the value added tax or the fringe benefits tax before the income tax, which was in force a century and more earlier.

Answer: B

J.M. Buchanan is associated with public choice theory (a-3), Findlay Shirras with the canons of public expenditure (b-1), R.N. Bhargava with federal finance (c-4) and A.P. Lerner with functional finance (d-2). The code is 3, 1, 4, 2, option (B). Option (A) gives Shirras functional finance, (C) gives Buchanan functional finance and (D) gives him the canons of public expenditure, so they do not agree with the authors.

Answer: C

The concept of 'effective revenue deficit' was used for the first time in the Union Budget for 2011-12. It is the revenue deficit minus the grants given by the Centre for the creation of capital assets, since those grants are revenue expenditure in form but lead to assets.

The Budgets of 2008-09, 2009-10 and 2010-11 did not carry the term, so options A, B and D are wrong; the idea followed the recommendations of the Thirteenth Finance Commission.

Answer: D

Corporation tax is likely to contribute the most to the Central Government's tax revenue in 2011-12, ahead of income tax, central excise duty and customs duties. In the budget estimates for that year the corporation tax was the largest single item, which is the key.

Excise and customs, once the main sources of central revenue, had fallen in their share as rates were lowered with the reforms. Income tax was smaller than corporation tax in that year.

The shift in the tax mix towards direct taxes has come with the lowering of customs and excise rates since the reforms of 1991, and corporation tax has been growing faster than the indirect taxes.

Answer: C

The gross fiscal deficit of State Governments is financed by market borrowings (I) and loans from the Central Government (III), with some other sources such as small savings and provident funds. So 'I and III' is option C.

States cannot print currency (II), since that power rests with the RBI and the Centre, and external borrowing (IV) is in the hands of the Centre, so options A, B and D, which include II or IV, are wrong.

Answer: A

The correct matches are i-2, ii-3, iii-1, iv-4. The canons of taxation are those of Adam Smith (equality, certainty, convenience and economy), the canons of public expenditure are given by Findlay Shirras, the effective incidence of a tax is the concept of U.K. Hicks (Ursula Hicks), and the benefit received approach is linked with Erik Lindahl. The code is 2 3 1 4, option A.

The other options exchange these writers, for example giving the canons of taxation to Hicks or to Lindahl.