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ECS3704

Public Economics

ECS3704

Department of Economics

IMPORTANT INFORMATION:

This tutorial letter contains important information

about your module.

Dear Student

This document contains the following:



specific questions and answers

SPECIFIC QUESTIONS AND ANSWERS

Please work through these questions and answers and familiarise yourself with the concepts. It is

important for the upcoming examination in May/June 2016. Note that the examination paper is a fill-in

examination paper. The purpose of the abridged answers is to give you an indication of how the

questions have to be interpreted and what information has to be included in the answers.

QUESTION 1

(a)

What is the meaning of administrative tax efficiency?

Answer:

(2)

minimising administration costs and compliance costs

b)

Provide only the mathematical equation that summarises Condition 3 (top-level simultaneous equilibrium) of the benchmark model of resource allocation.

(1)

Answer:

MRPT xy 

(c)

MCx Px



 MRS a xy  MRS b xy

MCy Py

When deriving the demand curve for public goods, individual demand curves are summed

(i)............ implying that consumers are (ii) .............. . Underline the correct alternative.

Answer:

(i)

(ii)

vertically / horizontally

quantity takers / price takers

(2)

QUESTION 2

Why are general taxes (e.g. a tax on all motor cars) more efficient than selective taxes (e.g.

an excise tax on only BMWs)? Explain your answer using indifference curves.

(15)

Answer:



original equilibrium at E0



selective tax on BMWs.. distorts relative prices... budget line pivots (AB to AF)… new

equilibrium at E2



compare a neutral tax to selective tax which generates same tax revenue (GE2)



neutral tax e.g. lump-sum tax (general tax on all motor cars) ... parallel shift of budget line

(AB to CD)



equilibrium at E1



excess burden is illustrated by welfare/utility differences (U1 versus U2)

Diagram (5 marks)...