Public Finance Practice Questions I

1. Briefly explain why the self-correcting failure of the market underpin the Keynesian
School of thought on Public Finance.
2. Contrast the classical school of thought on PF with the Keynesians’.
3. How is the Chicago School on PF similar to the Keynesians’?
4. How is the Chicago School on PF similar to the Classicals’?
5. Briefly explain how government interventions guide, correct and supplement market
mechanism in certain respects.
6. Why are government intervention activities common in developing economies like
Ghana?
7. Distinguish between positive and normative analyses in PF.
8. State and briefly explain any three economic objectives of government intervention or
public policy.
9. Briefly explain the two principles of equity in PF.
10. With one example each, briefly distinguish between vertical equity and horizontal equity.
11. Distinguish between Rawlsian social welfare and utilitarian social welfare concepts.
12. Briefly explain two problem of utilitarian social welfare function.
13. Distinguish between Rawlsian social welfare and utilitarian social welfare concepts on
the basis of wealth inequality.
14. Differentiate between consumer surplus and producer surplus.
15. Explain the effect of monopoly on consumer surplus.
16. Broadly explain how maximization of self-interest advances the arguments for no need
for public policy (following Adam Smith).
17. Briefly explain the efficiency condition in a single market situation.
18. What is Pareto efficiency of a market?
19. Briefly explain the three criteria for market efficiency (Pareto Efficiency).
20. What is the layman’s explanation to each criterion of Pareto efficiency?
21. Briefly explain how price can bring about Pareto efficiency.
22. Why do competitive markets satisfy Pareto efficiency?
23. Why are market in which participants face the same price Pareto efficient?
24. What is the role of government in “first best” and “second best” solutions in fundamental
welfare theorems?
25. Briefly explain three roles of government even if the market is efficient.
26. How is market failure similar to market efficiency or otherwise?
27. Why does the market fail when there is imperfect competition?
28. Why does the market fail when there is there are externalities?
29. Why does the market fail when public goods are needed?
30. Why does the market fail in incomplete markets?
31. Why does the market fail when there is information asymmetry?
32. Why are externalities a source of market failure? Is there any remedial action by the
government? Illustrate with relevant diagrams.
33. Define the term “Market failure” and explain six conditions that bring about market
failure.
34. Explain five factors that warrant intervention in the economy by the government with
examples from Ghana.
35. Briefly explain how excludability make the market efficient.
36. Briefly explain the efficiency implication of goods non-rivaled in consumption.
37. Differentiate between a pure public good and an impure public good.
38. What is “free rider problem”? How does it relate to the provision of public goods?
39. Briefly explain how non-excludability leads to free ridership of a pure public good.
40. Briefly explain how non-rivalriness in consumption leads to free ridership of a pure
public good.
41. Briefly explain the Samuelsonian condition for efficient provision of a public good.
42. Define “Public good” and explain how the efficient output of a public good is determined
with the help of a diagram.
43. Briefly explain how technological advances can change a pure public good into an
impure public good and give one example.
44. Briefly explain why private entrepreneurs are able to provide some public goods like
radio broadcast.
45. Briefly explain two ways by which private market induces payment for public goods.
46. Briefly explain the misallocation situation of positive externalities versus negative
externalities.
47. Briefly explain what makes the market under-produce (or over-produce) when there is
positive (or negative) externalities.
48. Briefly explain how a subsidy address a positive externality problem.
49. Briefly explain how a Pigouvian tax address a negative externality problem.
50. Briefly explain why government intervention rather than the Coase Theorem is
necessary to solve externality problem in the market.
51. Briefly explain why the Coase Theorem can resolve an externality problem.
52. State three ways by which government can intervene to fix externality problems.
53. Briefly explain why market failure can lead to government failure.
54. State three reasons for government failure.
55. State two tax and non-tax source of revenue to the government.
56. Briefly explain any three attributes of a good tax.
57. Explain any three allocative and redistributive effects tax imposition.
58. Briefly explain how the imposition of income tax can elicit more work effort.
59. Differentiate between tax equivalence and tax neutrality.
60. Briefly explain one problem of the benefit principle of taxation.
61. Advance arguments for and against the benefit-received and ability to pay approaches
to taxation.
62. Differentiate between horizontal equity and vertical equity in taxation.
63. State one problem each of horizontal equity and vertical equity application in taxation.
64. With reference to substitution effect (dis) and income effect (inc), explain the incentive
and disincentive effect of an income tax imposed on a worker.
65. State any good attributes of Ghana’s e-levy.
66. What is difference between backward shifting and forward shifting of a tax burden?
67. Taxes on goods with fairly inelastic demand have less efficiency loss than those with
elastic demand. True or False. Explain.
68. State any two reasons for which Laffer-Dupuit proposition on the relationship between
tax rate and tax revenue is valid.
69. State four reasons why taxation is bad or otherwise for the development of Ghana.
70. Discuss how elasticity of demand and supply determines the proportion of a specific tax
borne by the consumer or the producer.
71. Explain two ways by which a tax can engender allocation or reallocation.
72. How would a tax achieve a redistributive effect?
73. The welfare cost (loss) of an excise tax depends on the elasticities of demand and
supply. Explain this statement with the help of appropriate diagrams.
74. In the midst of pervasive poverty in your country, how would people view the funding of
a pure public good? Explain your position.
75. Explain the concept of externalities in Public Finance and the role government should
play in their operation.
76. The growing public expenditures and the accompanying high budget deficit are source
of concern to some development analysts. How can the trend be justified in Public
Finance.
77. What is the concept of “incrementalism” in the budgetary process and how can it be
imperically justified?
78. Discuss, with examples, the role government can play when there is a market failure
due to the existence of:
(i) producer to producer negative externalities
(ii) producer to consumer external diseconomies
(iii) producer to consumer positive externalities
(iv) consumer to consumer negative externalities
79. State the specific type of externalities for the following scenarios:
(i) Dumping of waste by a waste management company near a lorry station.
(ii) Smoking cigarette in an internet café.
(iii) Provision of free wireless access by a hotel in a city
(iv) Treatment of hepatitis B by a room mate
80. What is market failure? To what extent do you agree with the view that “Market
mechanism alone cannot perform all economic functions. Public policy is needed to
guide, correct and supplement it in certain respects”.
81. Why is government intervention likely to fail where the market mechanism fails?
82. Compare and contrast market failure with government failure.
83. Compare (similarities) and contrast (differences) market failure with government failure.
84. State any three factors that can make public policy fail to improve market failure.
85. How is the problem of market failure due to externalities similar to that of public goods?
86. How is the utilitarian SWF different from the Rawlsian SWF?
87. Why will you prefer Rawlsian SWF to the utilitarian SWF or otherwise?
88. State any three economic functions expected of a government in a mixed economy
89. What is horizontal equity?
90. How will horizontal equity be achieved in the award of national projects?
 91. Compare and contrast the views of classical economists to that of Keynesians on public
finance
92. What is a market failure? Critically examine the reasons for which a market fails?
93. Why is progressive tax structure more equitable?
94. Briefly explain how the two distinguishing characteristics of pure public goods lead to
market failure.
95. What is market efficiency? Briefly explain the conditions that would make the market
efficient.
96. With the aid of a matrix, distinguish between pure public goods and impure public
goods.
97. State the economic functions of expected in government intervention.
98. State any three economic objectives of public policy.
99. State four reasons why taxation is bad or otherwise for the development of Ghana.
100. Briefly explain why the Coase Theorem cannot always resolve negative externalities.
101. Briefly explain any two private solutions to negative externality problem.
102. What is the main role of the government in a perfectly competitive market economy?
103. Briefly explain the similarities and difference between a public good and an externality.
104. State any three good attributes of Ghana’s Communication Service Tax.
105. What is difference between backward shifting and forward shifting of a tax burden?
106. “Who bears more tax burden and why” if (i) demand is inelastic (ii) Supply is elastic (iii)
demand is elastic (iv) supply is inelastic (v) market is monopolistic (vi) time horizon is
short (vii) cost structure is increasing.
107. Briefly explain why a tax on a good with perfectly elastic demand falls entirely on the
seller.
108. Briefly explain why producers can entirely forward shift a tax in the long run horizon.
109. Why do we have 100% backward shifting of a tax burden in a perfectly competitive
market.
110. Taxes on goods with fairly inelastic demand have less efficiency loss than those with
elastic demand. True or False. Explain.
111. State any two reasons for which Laffer-Dupuit proposition on the relationship between
tax rate and tax revenue is valid.
112. Briefly explain how taxation can increases in work effort as a result of income effect.
113. State any three external sources of revenue to the government of Ghana.
114. What is a public debt?
115. Distinguish between government’s recurrent expenditures and its capital expenditures.
116. State any two implications of budget deficit on the stability of the Ghanaian economy.
117. Briefly justify why financing government budget deficits through domestic borrowing is
less preferable to sourcing external resources.
118. Distinguish between public borrowing and public debt.
119. Why is cost-benefit analysis important in public expenditure decision making? Because
government expenditures are more for equity reasons hence to ensure some level of
efficiency, it is required that the discounted benefits of a public expenditure exceeds the
discounted costs and CBA does ensures this. To ensure efficiency in government
spending.
120. The people of Kojokrom need 50 streetlights to enhance the general security of the
town. The 50 streetlights could be produced at a marginal cost of 910GHC.
(a) Discuss why a private entrepreneur will fail in providing the 50 streetlights in Kojokrom.
(b) Assume that three security-conscious individuals are willing to pay some amount for the
provision of the streetlights as P1=500-Q, P2=200-Q and P3=300-Q respectively, where
P is price and Q is number of streetlights.
(i) If a private entrepreneur wants to provide the streetlights, how many will he
provide?
(ii) Why would the private entrepreneur be able to provide only the number in (i)
above.
(iii) Briefly explain two limitations to provision of the number of streetlights in (i) by
the private entrepreneur.
(iv) Why would it be inefficient to exclude those who did not pay from consuming the
number of streetlights provided in (i) above?
(c) Explain why the people of this community would be justified if they petition the
government to provide the 80 streetlights. Would government be able to provide the 80
streetlights for community? Why? Briefly discuss why government will be able to
provide the 50 streetlights in Kojokrom.
(d) Discuss one problem the government could face if it wants to efficiently provide the 50
streetlights.
121. In a competitive constant cost industry, the marginal cost is GHC50 and the private
demand function of individuals of a good whose production generates external costs is
P=250-4Q. If the marginal external cost (MEC) function is: MEC=-120+4Q, find the
following:
(i). Inefficient quantity (ii). Efficient quantity
(iii). Level of per unit tax needed to produce efficient quantity.
(iv). Marginal external cost before and after the tax and comment on your results. (v)
Provide a sketch of your work.
122. In a competitive constant cost industry, the marginal cost is GHC50 and the private
demand function of individuals of a product whose consumption generates external
benefits is P=250-4Q. If the marginal external benefit (MEB) function is: MEB=220-4Q,
find the following:
(i). Inefficient level of output. (ii). Efficient level of output
(iii). Level of govt subsidy needed for socially optimal output.
(iv). Marginal external benefit before and after the subsidy and comment on your
results.
(v) Provide a sketch of your work.