Public Economics Questions and Answers

Answer: A

A payment is acceptable to both when \((MSC - MPC) \gt p \gt (MPB - MPC)\).

With property rights resting with the polluter, the affected party must pay the polluter to cut output by a unit. The polluter accepts only if the payment covers what it gives up on that unit, its net private gain \(MPB - MPC\). The affected party pays only if the payment is less than the damage avoided, the marginal external cost \(MSC - MPC\). Both conditions together give \(MSC - MPC \gt p \gt MPB - MPC\).

The option with the inequalities reversed would have the affected party pay more than the damage it avoids. The options built on \(MPC - MSC\) and \(MPC - MPB\) flip the signs of these gains; with a negative production externality \(MPC - MSC\) is negative, so it cannot exceed a positive payment.

Answer: D

The channel no longer in use is Transfer for plan implementation under Gadgil formula.

The Gadgil formula (and its later Gadgil-Mukherjee version) decided how Central plan assistance was divided among the States. With the abolition of the Planning Commission in 2015 and of the plan and non-plan distinction from 2017-18, normal Central assistance under that formula came to an end.

The other three are current channels: the States' share in Central taxes on the Finance Commission's recommendation, grants-in-aid under Article 275 and others, and Centrally Sponsored Schemes run through the ministries.

Answer: C

The tax assigned exclusively to the States is Land Revenue.

Land revenue is entry 45 of the State List in the Seventh Schedule, so only the States may levy and collect it.

Income tax (other than on agricultural income) and corporation tax are Union List taxes. GST is a shared tax under Article 246A: the Centre and the States both levy it on intra-state supplies, and the Centre alone levies IGST on inter-state supplies, so it is not exclusively a State tax.

Answer: D

The answer is The difference between total revenue and total expenditure of the government.

Fiscal deficit measures how far the government's total expenditure exceeds its total receipts other than borrowings. It therefore equals the government's total borrowing requirement for the year:

\[ \begin{aligned} \text{FD} &= \text{Total expenditure} \\ &\quad - (\text{Revenue receipts} + \text{non-debt capital receipts}) \end{aligned} \]

The option states this loosely, treating all non-borrowed receipts as 'total revenue'. The other options describe different measures: borrowing from the RBI is monetised deficit, current expenditure minus current revenue is closer to the revenue deficit, and the sum of monetised and budgetary deficit is not a defined measure.

Answer: B

A tax on the sale of inherited property is Capital Gain Tax.

Inheriting property is not taxed in India, but when the heir sells it, the difference between the sale price and the cost of acquisition is a capital gain. For inherited assets, the cost and holding period of the previous owner are taken into account, and the gain is taxed under the head 'Capital Gains'.

Income tax is the wider law under which this head falls, but the specific levy is capital gains tax. Wealth tax was abolished from 2015-16, and land tax is a State levy on holding land, not on selling it.

Answer: B

Only statement C is true, so the answer is Only C is true.

Corporation tax is the income tax charged on the profits of companies and corporations registered under the law. It is levied on the income of companies, both Indian and foreign, and not on individuals.

Statement B is wrong because individuals and Hindu Undivided Families pay personal income tax, not corporation tax. Statement A is wrong because unregistered bodies are not taxed as companies. That rules out options including A or B.

Answer: A

The item that is not non-tax revenue is Interest tax.

Interest tax, levied on interest earned by banks and credit institutions under the Interest Tax Act, is a tax, so it belongs to tax revenue.

The other three are non-tax revenue of the government: dividends and profits from public sector undertakings and the RBI, external grants received from other countries and agencies, and interest receipts on loans given by the government.

Answer: C

The Adhiniyam was passed in 2005.

Following the central Fiscal Responsibility and Budget Management Act of 2003 and the Twelfth Finance Commission's recommendation that states enact similar laws, Madhya Pradesh passed the Madhya Pradesh Rajkoshiya Uttardayitva Evam Budget Prabandhan Adhiniyam, 2005. It set targets for eliminating the revenue deficit and limiting the fiscal deficit to 3 per cent of gross state domestic product, and requires the government to place fiscal policy statements before the Assembly.

2003 is the year of the central FRBM Act, not the state law, and 2004 and 2006 are not the year of the Madhya Pradesh Act.

Answer: B

The Twelfth Finance Commission was chaired by Dr. C. Rangarajan.

The Twelfth Finance Commission covered the period 2005-10. Under C. Rangarajan, a former Governor of the Reserve Bank, it recommended raising the states' share of central taxes to 30.5 percent and a debt consolidation and relief facility linked to fiscal responsibility laws.

The others chaired different commissions: A.M. Khusro the Eleventh (2000-05), Dr. Vijay Kelkar the Thirteenth (2010-15) and Y.V. Reddy the Fourteenth (2015-20).

Answer: A

The key's answer is Haryana, Maharashtra, Karnataka, Punjab.

What could be confirmed: Haryana's finance minister announced in July 2018 that Haryana had the highest per capita revenue under GST in the first GST year (2017-18), at about Rs 1,877, and a newspaper report of the announcement put Punjab ninth, at about Rs 456. A first place for Haryana rules out the two options that begin with Maharashtra, and a ninth place for Punjab fits an order that leaves Punjab last of the four rather than second.

What could not be confirmed: no published table was found that gives per capita figures for Maharashtra and Karnataka, so the order of those two, and the claim that both stand above Punjab, rests on the key rather than on a source we could check. The Haryana figures are a state government statement, not an audited ranking, and they cover the nine months of GST in that year. Treat the key as the Commission's answer, and do not rely on this ranking as a general fact about state finances.