THE INSTITUTE OF FINANCE MANAGEMENT

DEPARTMENT OF ECONOMICS AND TAX MANAGEMENT

PUBLIC FINANCE (ECU_08606) – BEF 3
REVIEW QUESTIONS SET 1

Q1. What is Public Finance? What are the roles of Public Finance?

Q2. What is Tax? What are the uses of Tax in a country like Tanzania?

Q3. Clearly distinguish between organic and mechanistic view of roles of the government in the
society.

Q4. Clearly distinguish between Normative and Positive economics as tools of Public Finance.

Q5. The market system does not produce public goods because private firms cannot stop
consumers who are unwilling to pay for such goods from benefiting from them. Do you agree?
Why or why not?

Q6. What are the principles/canons of a Good Tax System?

Q7. Clearly distinguish between Government Failure and Market Failure.

Q8. Explain the statement that “Publicly provided private goods are characterized by features
similar to impure public goods”.

Q9. Market mechanisms are unlikely to provide public goods efficiently, even if such goods are
excludable in consumption. Explain by using examples

Q10. With examples distinguish between positive and negative externalities both in consumption
and production.

Q11. Mention and explain and four (4) solutions to the problem of externality.

Q12. To achieve market equilibrium in the presence of externality, efficiency criteria requires
that we set the Marginal Social Cost equal to Marginal Social benefit. With the aid of a diagram
illustrate this statement.

Q13. Clearly distinguish between Tax Avoidance and Tax Evasion.

Q14. Suggest measures that can be used to combat Tax Evasion in a country like Tanzania.

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Q15. Government intervention seems to be a perfect solution to the market failure. Critically
evaluate this statement.

Q16. In a Pure Public Good, there is no ability to exclude and no rivalry for benefits while in a
Pure Private Good there is clear ability to exclude and rivalry for benefits. Critically evaluate this
statement.

Q17. What is the burden of tax? Distinguish between statutory and economic incidence of a tax.

Q18. Consider a competitive market with demand given by Pd = 100-2Q and supply given by

Ps = 10+Q

a) Find competitive equilibrium price and quantity.

b) Suppose government introduce per unit tax of t = 15 on producers. Find the quantity
traded in the market after tax. Find the price paid by the consumer and the price received
by the producer after tax.
c) Show results obtained in part (a) and (b) above on a diagram.

Q19. What determines the extent to which a producer or a consumer bears the tax burden?

Q20. Distinguish between Lump sum tax and proportional tax.

Q21. While the market demand for a pure private good is derived by adding the quantities
demanded at each price, demand for pure public good is derived by adding how much people
will be willing to pay at each quantity. With the aid of a diagram(s) illustrate this statement.

Q22. The socially optimal level of the public good requires that we set the Marginal Social
Benefit of that good equal to its Marginal Social Cost. With the aid of a diagram illustrate this
statement.

Q23. A match box in Tanzania is sold at Tshs. 200 each. Assuming that supply curve is perfectly
elastic and demand function for match box is P = 325 – 1.25Qd. Calculate the effect on price and
quantity demanded of the introduction of VAT at a rate of 20%, and determine the resulting
deadweight loss and tax revenue collected.

Q24. What is the free rider problem? Briefly explain how the free rider problem will result into a
market failure.

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Q25. While the marginal cost of allowing another person to benefit from a pure public good is
zero, the marginal cost of providing a greater level of public good is positive. Critically evaluate
this statement.

Q26. Taxing producer or a consumer does not really matter under perfect market situation.
Justify this statement

Q27. With examples distinguish between a pure public good and impure public good.

Q28. Distinguish between marginal tax rate and average tax rate.

Q29. The fact that cigarette sales do not change much when cigarette taxes are increased allows
us to conclude that cigarette companies bear most of the burden of the cigarette tax. Do you
agree? Why or why not?

Q30. Congestible public goods are those goods in which derived utility tends to diminish as the
population increases. Illustrate this statement with examples

Q31. Distinguish between ability to pay principle and benefit principal of taxation.

Q32. In a Pure Public Good, there is no ability to exclude and no rivalry for benefits while in a
Pure Private Good there is clear ability to exclude and rivalry for benefits. Do you agree, why or
why not?

Q33. Illustrate how tax can be used as a solution to negative externality in consumption and
production.

Q34. Free riding occurs when people are honest in stating their Marginal Benefits, however if
they can understate it, they can get a slightly reduced level of the public good while paying
nothing for it. Do you agree? Why or why not?

Q35. Briefly explain the meaning of the following terms as used in Public Finance:
a) Voting Paradox
b) Rational voter ignorance
c) Logrolling
d) Majority voting rule
e) The median voter theorem
f) Arrow’s impossibility theorem
g) Pareto optimality

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Q36. Consider the following information given below for three voters, three alternative and the
voter’s preferences.
Table I
Choice Voter
Juma Joyce Josephine
First A C B
Second B B C
Third C A A

Table II
Choice Voter
Juma Joyce Josephine
First A C B
Second B A C
Third C B A

a) Plot the above voter’s preference in a diagram (s)

b) Determine if there will be majority vote rule or there will be a voting paradox.

Q37. Suppose there are five people: 1, 2, 3, 4, and 5; who rank projects A, B, C, and D as follows:
1 2 3 4 5
A A D C B
D C B B C
C B C D D
B D A A A

a) Sketch the preferences in a diagram

b) Will any project be chosen by majority vote rule? If so which one? If not, explain why.
c) Is there any preference which reflects voting paradox? If so which one?

Q38. Assume that the demand curve for a good is given by P = 8 - q and the supply curve is
given by P = q. The government considers imposing a tax on the consumers equal to T = 2 for
each unit. Derive and show in a figure the produced quantity with and without the tax and the
government’s tax incomes.

Q39. With aid of diagrams distinguish between regressive and progressive taxes.

Q40. Taxes can be used as a source of revenues but also can be used as preventive measures.
Critically explain how the taxes can be used as a preventive measure.

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Q41. The demand and supply functions of a good are given by
P  2Qd  50
1
P Qs  25
2
Where P, Qd and Qs denote price, quantity demanded and quantity supplied respectively. You
are required to determine the equilibrium price and quantity.

Q42. The demand and supply functions of a good are given by

P  5Qd  80
P  2Qs  10

Q43. Where P, Qd and Qs denote price, quantity demanded and quantity supplied respectively.
a) Find equilibrium price and quantity.
b) If the government deducts, as tax, 15% of the market price of each good, determine the
new equilibrium price and quantity.

Q44. The demand and supply functions of a good are given by

P  Qs  8
P  3Qd  80
Where P, Qd and Qs denote price, quantity demanded and quantity supplied respectively.
a) Find the equilibrium price and quantity if the government imposes a fixed tax £36 on
each good.
b) Find the corresponding value of the government’s tax revenue.

Q45. In a competitive market, the supply schedules is p = 4 + 0.25q and the demand schedule is
p = 16 − 0.5q
What would happen to the price paid by consumers and the quantity sold if
a) A per-unit tax of £3 was imposed, and
b) A proportional sales tax of 20% was imposed?

Q46. Consider an economy with two individuals: Individual 1 has (inverse) demand curve for
public good given by P1 = 600 – 20Q, while individual 2 has (inverse) demand curve for public
good given by P2 = 900 – 50Q. The prices are measured in TZS per unit, and the Marginal
Private Cost (MPC) of producing the public good is TZS 100 per unit.
a) Required to compute the Marginal Social Benefit (MSB)
b) Required to determine the efficient level of the public good to be provided

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Q47. Suppose that in year 2020 the tax on beer was Tshs. 200 per liter and 8 million liters
were sold, yielding a revenue of Tshs. 1,600 millions. In year 2021 the tax is raised to Tshs. 240
per liter and 8.1m liters are sold, for a revenue of Tshs. 1,944 millions. Inflation is running at
15% annually and real GDP is raised by 2.5%.
a. Find Tax Buoyancy and interpret the results.
b. Find Tax Elasticity and interpret the results.

Q48. Suppose that between 2020 and 2021 nominal GDP rises by 20% and the revenue collected
by excise taxes on beer rise by 21%. Inflation is estimated at 15%. Calculate the tax buoyancy
and interpret obtained result.

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