Section10

Question 1

What are the main components of government spending?

Answer 1

Government spending includes:

• Transfer payments (e.g. pensions, education programmes, unemployment benefits)
• Purchase of public goods and services
• General public policy programmes

Question 2

What are transfer payments?

Answer 2

Transfer payments are government payments not made in exchange for goods or services, e.g. pensions, education programmes, and intergovernmental transfers.

Question 3

What are the sources of government revenues?

Answer 3

• Sale and leasing of goods and services
• Contributions:
  
  • Taxes (obligatory, not for specific services)
  • Fees (obligatory, for specific services)
• Loans (not revenues in the original sense)

Question 4

What are the types of taxes?

Answer 4

Types of Taxes:

• Direct Tax: Levied on income and wealth
• Indirect Tax: Levied on goods and services (e.g. VAT)

Amounts of Tax:

• Specific Tax: Per unit of a good
• Ad valorem Tax: Percentage of the good’s price

Question 5

What is tax incidence?

Answer 5

Tax incidence describes how the burden of a tax is shared among market participants. It depends on price elasticity and affects market equilibrium.

Question 6

What is the benefits principle of taxation?

Answer 6

The benefits principle suggests taxes should reflect the benefits received from government services, e.g. petrol tax financing road maintenance.

Question 7

What is the ability-to-pay principle of taxation?

Answer 7

The ability-to-pay principle suggests taxes should be based on an individual’s capacity to shoulder the burden. Related concepts:

• Vertical equity: Higher incomes pay more
• Horizontal equity: Similar incomes pay the same

Question 8

What is deadweight loss in taxation?

Answer 8

Deadweight loss refers to the inefficiency caused when resources are misallocated due to tax incentives rather than actual costs and benefits.

Question 9

What is government failure?

Answer 9

Government failure occurs when political power or incentives distort decisions, preventing the promotion of economic efficiency.

Question 10

What is public choice theory?

Answer 10

Public choice theory asserts that individuals in the political process act to maximise their own utility, which can hinder efficient allocation of resources.