Question

PART A (65%) Answer four of the following questions. Use diagrams where appropriate in your answers. 1. Using an Edgeworth-Bowley Box diagram, explain what is meant by 'exchange efficiency'. 2. What is a 'negative externality"? Outline the solution proposed by Pigou to the problem of negative externalities, using a diagram to illustrate. 3. What is a 'public good? How can the government decide how much of a public good should be provided? 4. Outline why majority voting is likely to result in an inefficiently high supply of public goods. 5. Explain what is meant by 'horizontal equity' and 'vertical equity'. Briefly discuss whether using income as the basis of taxation is equitable.

Part 4,5 thank you

Answer 1

Solution 4

It is argued that majority voting leads to excessive exploitation of weaker and poorer sections of society and hence various public goods are made more attractive to higher richer sections of society who contribute maximum to finance these public goods. Had the voting being bifurcated there would be opposition from other parties which would have ruled out such inefficient allocation of resources

Solution 5

Horizontal equity suggests that those who have similar amount of wealth should be taxed at same rate within incone tax bracket.

Vertical equity suggest that those who higher amount of wealth should be taxed higher than who have lower amounts of wealth.

Income as basis of taxation is equitable however it safely ignores the assets and other intangible assets an individual has. There can be instances where person with higher incone has lower value of assets as compared to person with lower income. Hence, taxation should take into account weighted average of one's wealth, assets, income and households annual income.