QUESTIONS AND
ANSWERS
FOR ASSISTANCE CONTACT
EMAIL:gabrielmusyoka940@gmail.com
, lOMoARcPSD|31863004
ECS3704
This document contains the following:
▪ specific questions and answers
SPECIFIC QUESTIONS AND ANSWERS
Work through the below questions and answers and familiarise yourself with the concepts. These long
questions are important for the upcoming examination in October 2019. Note that the examination paper
is a fill-in examination paper. The purpose of the abridged answers is to give you an indication of how the
questions have to be interpreted and what information has to be included in the answers. This is not the
only questions that might appear in the examination.
QUESTION 1
(a) Evaluate the impact of an intergovernmental conditional non-matching grant with the aid of a
diagram. What would the rationale be for such an intergovernmental transfer? (10)
Answer:
• grant = AF (or HM = NE1)
• new budget line AFD
• spending on grant-aided public goods
➢ before grant = 0G
➢ after grant = 0M
➢ extra spending = GM (=PE1)
• spending on other public goods
➢ before grant = 0L
➢ after grant = 0K
➢ extra spending = LK
• part of grant is used on other public goods
• appropriate for activity that is low priority for sub-national government but high priority for
central government
Open Rubric
, lOMoARcPSD|31863004
ECS3704
Other
public C
goods
A F extra spending on
grant-aided goods
N P
K E1
L E0
B D
0 H J G M Grant-
aided
goods
(b) Discuss the economic impact of a tax on personal income (do not use a diagram). Refer to
the following in your answer: (a) work effort and empirical evidence (b) excess burden of the
tax. (10)
Answer:
• tax has income and substitution effect
o income effect – increase in tax rate causes lower after-tax income
o work effort increases to compensate for losses
o substitution effect – opportunity cost of leisure = wage
o tax causes after tax income to decrease, i.e., opportunity cost of leisure decreases
o consume more leisure at lower price
o work effort decreases
• combined effect important
• elasticity of supply of males less sensitive than elasticity of supply of married women
• relative prices are distorted (price of earning income vs. price of leisure)
• has excess burden
QUESTION 2
(a) Use a table to compare the key characteristics of public and private goods. (10)
Answer:
Criteria Public Private
Property rights Non-excludable Excludable
Consumption Non-rival Rival
, lOMoARcPSD|31863004
ECS3704
Aggregate demand curve Vertical addition of P Horizontal addition of Q
Equilibrium ∑MU =MC MU = MC
Pricing rule ∑P = MC P =MC
(b) Use a diagram to explain the potential benefits of a government housing subsidy for poor
buyers if housing supply is (i) inelastic and (ii) elastic. (10)
Answer:
Diagram (4 marks)
P
S1 (=MC)
P1 E1
P0 E0 E1 S0 (=MC)
D1
D0
0 Q0 Q1 Q
• if supply is perfectly inelastic (vertical) – short run case
o purchasing power increases
o demand curve shift (D0 to D1)
o prices of houses increase (P0 to P1)
o benefit of subsidy shifted to existing homeowners (capital gains)
• if supply is perfectly elastic (horizontal) – long run case
o demand curve shift (D0 to D1)
o quantity supplied increases (0Q0 to 0Q1)
o price unaffected
o no shifting of benefit – new owners get the benefit of subsidy
QUESTION 3
Discuss two key tax equity principles. What are the advantages and shortcomings of each?
(10)
Answer:
benefit principle
• user pays for benefits
• expenditure linked to revenue
• resource are efficiently allocated (benefit taxes = prices)
• benefits must be excludable
• existing distribution taken for granted
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller gabrielmusyoka940. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R45,03. You're not tied to anything after your purchase.
