Question

Answer the following questions regarding redistribution (Only Answer D and E)

A. Why must the government perform the redistribution function?

B. What are horizontal and vertical equity?

C. What are the differences among proportional, progressive, and regressive taxation?

D. What are the three ways subsidies can be provided in practice?

E. Comment on the relative efficiency and equity of these three methods.

Answer 1

D) The three ways subsidies can be provided in practice are:

• To increase the output of a certain product Production subsidy can be provided.
• Governments issue tax subsidies which are selective cash payments which consumers have to pay as taxes.
• A Consumer consumption subsidy is used to subsidize the behavior of consumers and is used in developing countries where food, electricity are subsidized by the government.

E) Production subsidies are found in developed markets and sometimes cause many problems like storage cost of products, depression of market prices and overproduction.
Tax subsidies distort the economy but are also less transparent. They are also difficult to undo.
Consumption subsidies are provided by the government and most cases have good effects on the common people.