Public Sector Economics

SECTION A

1. Using well labeled diagrams on Pigouvian taxes and subsidies, show that distributional

consequences of the tax and subsidy differ. [6 marks]

b. i. “The inefficiencies associated with externalities can be linked to the absence of a market for

the externality for the relevant resource”. Discuss the given statement. [3 marks]

ii. What solution can be implemented by the government to overcome the problem in b), i?

[3 marks]

c. Use a well labeled diagram/graph to illustrate the analysis of a positive externality

[3 marks]

SECTION B

Question 2

a. What do you understand by a pure public good? [2 marks]

b. State any three characteristics of a pure public good and explain what each of them means.

[3 marks]

c. Given the answer in (b) explain why the market fails to provide pure public goods.

[4 marks]

d. Briefly explain the problem of “free rider” which is associated with a public

good. [3 marks]

e. Explain why the provision of pure public goods by the government is justified.

[3 marks]

Question 3

Cost Benefit Analysis as a tool of project appraisal is often faced with a number of problems:

a. State and define any three cost- benefit criteria used for project appraisal. [4 marks]

b. What are the admissibility requirements for a project appraisal in each one of the three

criteria (in a)? [5 marks]

c. What are the problems associated with the use of each one of the three as a guide for a

project selection? [3 marks]

d. Why is the choice of discount rate (low or high) important in project evaluation and

selection? [3 marks]

Question 4

a. State any 5 requirements of a good tax structure, which may be used as criteria

to appraise the quality of a tax system and briefly explain each one of them. [3 marks]

b. With reference to the equity principle of taxation, explain what is meant by “fairness”

[6 marks]

c. Equity deals with equality of sacrifice which is defined by the following three distinct

interpretations:

i. Equal absolute...