Test: Public Finance -2 - JAMB MCQ

Equity is a principle of taxation that emphasizes fairness and the distribution of the tax burden. It implies that individuals with higher incomes or those who benefit more from public services should contribute a higher proportion of their income in taxes.

Tax incidence refers to how the burden of taxes is distributed among various individuals or groups in an economy. It examines who ultimately bears the economic burden of taxes, whether it is consumers, producers, or both.

When the demand for a good is relatively inelastic (less responsive to price changes) and the supply is relatively elastic (more responsive to price changes), sellers bear the majority of the tax burden. This is because they are less able to pass on the tax to consumers in the form of higher prices.

Income tax is an example of a progressive tax. Progressive taxes impose a higher tax rate on individuals with higher incomes. As income increases, the percentage of income paid in taxes also increases.

By stimulating economic growth. Public expenditure can positively impact the economy by providing funds for infrastructure development, education, healthcare, and other productive investments. These investments can enhance productivity, attract private investment, create jobs, and contribute to overall economic growth.

Social security benefits. Automatic stabilizers are government policies or programs that automatically adjust with changes in economic conditions to stabilize the economy. Social security benefits, such as unemployment benefits or welfare payments, act as automatic stabilizers because they provide income support during economic downturns, helping to reduce the severity of recessions.

Tax revenues are maximized at an intermediate tax rate. The Laffer curve illustrates the relationship between tax rates and tax revenues. It suggests that there is an optimal tax rate where tax revenues are maximized. If tax rates are too low or too high, tax revenues may decrease.

The free-rider problem. Public goods are non-excludable and non-rivalrous, meaning that individuals cannot be excluded from using them, and one person's use does not diminish the availability to others. This creates the free-rider problem, where individuals can benefit from the goods without contributing their fair share.

External costs, also known as negative externalities, are costs imposed on third parties who are not involved in the market transaction. Pollution from a factory is an example of an external cost because it negatively affects the environment and people living nearby.

The foregone alternative uses of the resources. The opportunity cost of public expenditure refers to the value of the best alternative forgone when resources are allocated to a particular government project or program. It represents the benefits or uses that could have been obtained if those resources were allocated differently.