Public Economics Questions and Answers

Answer: D

Using a car and emitting carbon harms others, who suffer from global warming, and the harm is caused by consumption. So it is a negative consumption externality. A production externality arises when the producer causes it. The answer is option D.

Because the harm is not priced, the car user ignores the cost to others, and a Pigouvian tax on carbon is the usual remedy for such a negative externality.

Answer: A

A negative externality is a cost borne by others who are not part of the transaction, and it is also called an external diseconomy. Marginal damage is the cost of one more unit, and the other options are not synonyms. The key gives external diseconomies, option A.

Answer: A

According to Pigou, maximum welfare requires the marginal social net product of resources to be equal in all uses. The key gives the condition as exactly equal to zero for the marginal social net product to be maximised, which is the answer, option A.

The key reads the condition as zero. Pigou's own statement in The Economics of Welfare is that welfare is greatest when the marginal social net products of resources are equal in all uses, so the printed option is the nearest of those offered. Nothing found shows the key to be wrong.

Answer: A

Both statements are true. In a depression, the government should run a deficit to raise demand, so a surplus budget is not desired. In an inflation, demand has to be cut, so a surplus is desired and a deficit budget is not wanted. The answer is both statements are true, option A.

Answer: A

Article 112 of the Constitution requires the President to lay before Parliament every year a statement of the estimated receipts and expenditure of the Government of India for the year, called the annual financial statement. Article 113 deals with the procedure in Parliament, Article 114 with appropriation bills and Article 115 with supplementary grants. The answer is 112, option A. The statement is presented every year, usually on the first of February, before the Finance Bill and the Appropriation Bill.

Answer: A

Both Statement 1 and Statement 2 are correct.

Revenue deficit is the amount by which revenue expenditure exceeds revenue receipts, which is exactly Statement 1.

Effective revenue deficit, introduced in the Union Budget of 2011-12, removes from the revenue deficit the grants given to states and others for the creation of capital assets. Such grants are booked as revenue spending by the Centre, but they build assets, so taking them out gives a truer measure of consumption spending financed by borrowing. That is Statement 2.

Answer: A

The pair that holds is (1) and (3) only.

Statement (1) is true: the 2024-25 Budget Estimate showed revenue expenditure of about Rs 46,667 crore out of a total outlay of about Rs 58,444 crore, which is roughly 80 percent. Statements (2) and (4) do not agree with published figures. The state's debt was about 44 percent of GSDP in 2022-23 on NITI Aayog's figures, far from 75.33. The budget allocation to health was a few thousand crore, not Rs 8,575 crore, while education was a little under Rs 10,000 crore.

With (2) and (4) set aside, only option A, (1) and (3), is left. The figure in statement (3), the own tax share of 27.4 percent, could not be checked independently and is accepted on the Commission's key. Options B, C and D each contain (2) or (4).

Answer: B

The relationship is shown by the Laffer Curve.

Associated with Arthur Laffer, the curve plots tax revenue against the tax rate. Revenue is zero at a 0% rate and also at a 100% rate, when no one has a reason to earn taxable income, so it rises at first and then falls, peaking at some intermediate rate.

The other curves describe different relationships. The J-Curve traces the trade balance after a currency depreciation, which worsens before it improves. The Phillips Curve relates inflation to unemployment. The IS Curve shows the combinations of interest rate and income at which the goods market is in equilibrium.

Answer: D

The correct statement is If \(SWF = \sum_{i=1}^{m} U_{i}\), it is referred as the utilitarian function.

Adding up individual utilities with equal weight is the classical utilitarian (Benthamite) social welfare function: society's welfare is the total of everyone's utility.

The other statements are wrong. Bentham and Mill gave every person's utility the same weight, so a function with weights that differ by individual characteristics is not their proposal. Because a social welfare function embodies value judgements, interpersonal comparisons of utility cannot be made on scientific grounds; that is the point the statement reverses. Rawls proposed the maximin rule, \(SWF = \min\{U_{1}, U_{2}, \ldots, U_{m}\}\), judging society by its worst-off member, not by the maximum utility.

Answer: D

The correct statement is Marginal social benefit is higher than marginal private benefit.

A positive consumption externality arises when one person's consumption benefits others, as with vaccination or education. Society's benefit is the consumer's own benefit plus the benefit to third parties, so \(MSB = MPB + MEB \gt MPB\), and the market under-consumes the good.

Marginal private benefit above marginal social benefit describes a negative consumption externality. The two statements about costs describe production externalities: marginal private cost below marginal social cost is a negative production externality, and marginal social cost below marginal private cost is a positive one.