NOTE3B

Question 1

Effects of public expenditure

Answer 1

-equitable resource allocation
-improved distribution of income
-raise aggregate demand
-to check inflation
-to generate employment

Question 2

General equilibrium analysis

Answer 2

The general equilibrium analysis is a multi-sector, multi-equation approach which looks at the interaction between markets and sectors.
The Harberger (1962) model is the first general equilibrium model of tax incidence.

Question 3

Balanced Budget Incidence

Answer 3

It refers to the effects of government expenditure on the income distribution, when an increase in government tax revenues is balanced by an equal increase in expenditures.
-It is the qualitative allocation of expenditures rather than its quantity which determines the incidence.

Question 4

Limitations of specific tax

Answer 4

-Specific tax incidence does not factor in changes in other markets, other tax changes,or movements in factors of production between sectors.

-Specific tax incidence is not very helpful for policy making.

-It simply deals with the effects on the income distribution resulting from a specific tax change.

Question 5

Wagner’s Law

Answer 5

according to Wagner’s Law, the growth in public expenditure over time should be greater than that of national output.

Question 6

Assumptions of general eequilibrium analysis

Answer 6

-a closed economy
-no fixed asset in terms of money
-perfect factor mobility
-homogenous marginal propensity to consume among consumers
-production functions are linearly homogenous with constant returns to scale

Question 7

Partial equilibrium analysis

Answer 7

is the traditional approach focusing on the incidence of tax in a single market

Question 8

Methods of incidence analysis

Answer 8

Statutort incidence of tax and Economic Incidence of tax

Question 9

What are statutory and economic incidence of tax

Answer 9

Statutory incidence indocates who is legally responsible for paying tax
Economic incidence refers to who bears the tax burden

Question 10

Equity concepts under ability to pay theory

Answer 10

Horizontal equity means that people in equal positions, or enjoying equal levels of welfare, should be treated equally, and they should contribute the same amount of tax.
The vertical equity principle asserts that people in unequal positions should be treated unequally.