Efficiency, equity and taxation

Question 1

Inefficiency

Answer 1

● Marginal benefit is greater/smaller than marginal cost at the output level
● Deadweight loss exists

Question 2

Positive externality

Answer 2

● no compensation paid by the third party
● MSB > MPB
● external benefit exists
● under-production from society’s viewpoint (MSB > MSC)
● subsidy can lower MPC to increase production until efficient output level

Question 3

Negative externality

Answer 3

● no compensation paid to the third party
● MSC > MPC
● external cost exists
● over-production from society’s viewpoint (MSC > MSB)
● tax can raise marginal private cost to decrease production until efficient output level

Question 4

Equity

Answer 4

● Equalizing income (income inequality)
● Equalizing opportunities (income-earning power in future)

Question 5

Direct / Indirect tax

Answer 5

Tax burden cannot / can be shifted to other parties

Question 6

Progressive tax

Answer 6

Average tax rate increases as the taxable income increases

Question 7

Proportional tax

Answer 7

Average tax rate remains unchanged as the taxable income increases

Question 8

Regressive tax

Answer 8

Average tax rate decreases as the taxable income increases

Question 9

Effects of tax/ policy on income distribution

Answer 9

● Disposable income of high-income group increase/ decrease
● Disposable income of low-income group increase/ decrease
● Income distribution becomes more/ less even
● Income inequality is improved/ worsened

Question 10

Principles of taxation

Answer 10

● Equality (proportional tax rate)
● Certainty (well-defined)
● Convenience (method of tax collection)
● Economy (low administration cost)

Question 11

Source principle

Answer 11

Income not derived from Hong Kong would not be taxed by the Hong Kong government

Question 12

Indirect tax not in Hong Kong

Answer 12

General sales tax