Public Economics Questions and Answers

Answer: C

Deficit financing means borrowing from the RBI.

In the Indian usage, deficit financing is the method of meeting a budget deficit by borrowing from the central bank, which in effect creates new money. Before 1997 the government did this by issuing ad hoc treasury bills to the RBI. Because it adds to money supply without adding goods, it tends to cause inflation.

The Revenue Department is part of the government itself, so the government cannot borrow from it. Loans from the World Bank are external assistance. Since the RBI option is correct, 'None of the above' is wrong.

Answer: C

The new tax is the Development Tax.

Punjab's Budget for 2018-19 introduced a Development Tax of 200 rupees a month (2,400 rupees a year) on every person paying income tax who is engaged in a profession, trade, calling or employment in the State. It was levied under the Punjab State Development Tax Act, 2018, using the power of States under Article 276 to tax professions, trades, callings and employments, which caps such a tax at 2,500 rupees a year.

Education Tax and Entertainment Tax are not this levy; entertainment tax had in any case been largely subsumed into GST in 2017. Since the Development Tax is the right answer, 'None of the above' is wrong.

Answer: C

Spectrum fees, PSU dividends and interest receipts are non-tax revenue, so the answer is Only 2, 3 and 4.

Non-tax revenue is the Government's current income that is not a tax, such as interest on loans it has given (4), dividends and profits from public sector undertakings (3), and fees and charges for services, including spectrum and other communication receipts (2).

Disinvestment receipts are different. Selling the Government's shares in a public enterprise reduces its assets, so the proceeds are a non-debt capital receipt, not revenue. That removes 'All of the above', while 'Only 3' and 'Only 3 and 4' leave out genuine non-tax revenue.

Answer: D

All four are potential benefits: 1, 2, 3 and 4.

Several Finance Commissions, most recently the Fifteenth, have recommended an independent Fiscal Council. Such a body, as in many other countries, would assess fiscal forecasts and monitor fiscal policy; check compliance with fiscal rules such as the FRBM targets and so strengthen fiscal performance; help keep the targets of the Union and the states consistent with each other; and report to the legislature and the public, improving accountability.

Each listed item is one of those roles, so no smaller combination is complete.

Answer: C

Cost-benefit analysis was developed in the USA for appraising investment in irrigation and transportation projects.

Cost-benefit analysis began as a practical tool of the US federal government for water resource projects. The Flood Control Act of 1936 required that the benefits of federal flood control and waterway projects exceed their costs, and the US Army Corps of Engineers and the Bureau of Reclamation used it for navigation, irrigation and other water projects.

Health, agriculture, technology and garden projects came under such appraisal only later, as the method spread, so they are not where it was developed.

Answer: A

The 14th Finance Commission raised the states' share from 32% to 42%.

The Fourteenth Finance Commission (chaired by Y.V. Reddy, report for 2015-20) recommended increasing the states' share in the divisible pool of central taxes from 32 per cent, the level set by the Thirteenth Finance Commission, to 42 per cent, the largest single increase ever, to give the states more untied funds and greater fiscal autonomy.

The other pairs misstate either the starting point (30 or 35 per cent) or the new share (40 per cent).

Answer: B

IGST is collected by the Central Government.

Under GST, intra-state supplies attract CGST, collected by the Centre, and SGST, collected by the state. Inter-state supplies and imports attract Integrated GST, which is levied and collected by the Central Government under the IGST Act, 2017. The Centre then apportions the state's share to the consuming (destination) state.

State governments collect SGST, not IGST. Municipal corporations have no role in collecting GST, and the Finance Commission recommends how revenue is shared but collects no taxes at all.

Answer: D

The person who was not a member of the 14th Finance Commission is C.H. Hanumanta Rao.

The Fourteenth Finance Commission (2013-2014) was chaired by Y.V. Reddy, with Sushma Nath, M. Govinda Rao and Sudipto Mundle as members and Abhijit Sen as a part-time member.

C.H. Hanumantha Rao is a well-known agricultural economist and a former member of the Planning Commission, but he was not a member of the Fourteenth Finance Commission. The other three names are its members, so they do not answer the question.

Answer: B

A public good is non-rival in consumption.

A pure public good has two defining features. It is non-rival: one person's use does not reduce what is available to others, as with national defence, street lighting or a lighthouse. It is also non-excludable: people cannot easily be prevented from using it, which leads to the free-rider problem and is why the market under-provides it.

Whether the public must pay for it, whether it costs more than a private good, or whether the government pays for it are not what define a public good. Governments also provide private goods, and some public goods are provided privately.

Answer: B

The reduction in welfare caused by a tax is the dead weight loss.

A tax raises the price buyers pay and lowers the price sellers receive, so fewer units are traded. Part of the lost consumer and producer surplus becomes tax revenue, but the surplus on the trades that no longer happen is lost to everyone. That net loss, the excess burden of the tax, is the deadweight loss, shown as a triangle on a supply and demand diagram.

Incidence describes who actually bears the tax, equity whether the burden is fairly shared, and efficiency in taxation is the aim of keeping the deadweight loss small.