Reference no: EM132792701

Public Finance

Question 1: a) The demand curves for good X of three consumers (A, B and C) are given by the equations:
Q_d^A = 100 - 0.2P_x Q_d^B = 300 - 0.5P_x and Q^C_d = 500 - 0.8P_x

The market supply curve for X is: MC_x = 50 + 8.5Q. Determine the market equilibrium if X were a private good. Will the market equilibrium be the same/different if X were instead a public good? Why? In case Xis a public good, determine the tax share of each individual using the benefit principle of taxation. Draw graphs to illustrate your answer.

b) Using the information on demand and costs given in part (a), explain what might happen if individual B volunteers to provide this good for all. Draw graphs and explain.

Question 2: Using the information in Q.1, suppose that: (i) Individual C states that his marginal benefit is 250. (ii) Individual A states that his marginal benefit is 100. Calculate their Clarke tax liability. Also show each case using an appropriate diagram.

Question 3: A community of five (05) persons needs to decide whether they should use their (pooled) resources for making a domestic game facility (G) or going out for a picnic trip (P). The table below gives the true benefits that each derives from each option. Determine the Clarke tax of each individual. If (i) Person 2 states that his benefit is 100 (ii) Person 3 states that his benefit is only 60, (iii) Persons 2 and 4 each overstates their benefit by 20, will their Clarke tax liabilities change? Will their total tax liabilities change?

Question 4: Suppose that the supply and demand for good H is described by the following equations:

Q^s = -150+ 0.40P

Q^D = 600- 0.2P

The production of H also creates marginal external costs of $165 per unit of H. Assuming that H is sold in a competitive market, what is the market price? How many units of good H will be produced per year at that price? What is the socially efficient output of H? Will taxing H @12.5 percent be socially optimal? What alternate tax policy you can suggest to achieve social efficiency? Also calculate the incidence of each of the taxes.

Question 5: Suppose that the production of goods X and Y is described using the production functions:

X = BL_xK_x Y = (2√L_y + 2√K_Y)X²

Determine the competitive equilibrium and the social equilibrium. Also calculate the rate of the Pigouvian subsidy to correct for the misallocation of resources under competitive equilibrium.

Question 6: For a particular product y, the average cost of production (AC) is given by the expression: AC = 20+ 2.5y . The demand for goody is: P = 152- 0.5y Assume that the production of y also creates an external effect for its neighbors, the average value of which is given by the expression: E =12+0.75q .

a) Assume that the firm has the property rights. In the absence of an agreement with its neighbors, what level of output would it want to produce? Suppose that the neighbors negotiate with the firm. To what level of output would the negotiations lead? What is the minimum payment that the neighbors must make to the firm to achieve this change in output? What is the maximum payment?

b) Assume that the neighbors have the property rights. In the absence of an agreement between the firm and its neighbors, what would the level of output be? If an agreement between the firm and its neighbors is negotiated, what are the smallest and largest payments that the firm would have to pay?

c) Assume that the firm has the property rights. If the government wishes to control 8the externality, what should the rate of the Pigouvian tax/subsidy be? What is the amount of an equivalent lump-sum tax/subsidy? How much revenue does government collect?

Question 7: An individual earns wage income (W) at the rate of Rs. 30,000 per month. He also owns physical assets that were worth Rs. 600,000 at the beginning of the fiscal year but now have a market value of 690,000. The individual's income tax liability is determined under a proportional tax system (with ATR = MTR = 7.5% ) on the basis of his net worth at the end of the fiscal year. He is also subject to paying wealth tax @ 2% per annum and a capital gains tax @ 1.5% per annum. Calculate the total tax liability of the individual when the tax system allows for (a) zero inflation, and (b) 12% inflation. On the basis of your calculations, explain what is the correct way of taxing capital gains in the presence of inflation?

Question 8: The income profile of three individuals is described below:

Person C also receives a windfall income of 24500 in 2019. The tax system is described as follows: The first 2500 Rs. are exempt from income tax. Then income upto Rs.7,500 is taxed @ 4%. Income between Rs.7,500 and Rs.15,000 is taxed @ 9%, Income between Rs.15,000 and Rs.25,000 is taxed @ 12.5% while income above Rs.25,000 is taxed @ 15%.. Calculate the total (lifetime) tax liability of all persons. Is this tax system horizontally equitable? Is this tax regime regressive/progressive? Suggest some policy measures that the government may adopt in this scenario to make the tax system equitable?