PUBLIC fINANCE

2008

Public finance
Public finance is known as public sector economics or public economics focus on the taxing and spending activities of government and their influence on the allocation of resources and distribution of income.
Public finance is the study of the role of the government in the economy. It is the branch of economics which evaluate the government revenue and government expenditure of the public authorities and the modification of one or the other to achieve desirable effects and avoid undesirable ones.
Subject Matter of Public finance
Subject matter of public finance is:
1. Public expenditure: Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc
2. Public revenue: Public Revenue is the income realized by the government for purposes of financing public administration. Public revenue may be realized from taxation of the various entities and activities within the country or from non-tax sources such as revenue from government-owned corporations, public wealth funds, grants etc.
3. Public debt: Public debt refers to the amount of money payable by a central government. The operations of a government are normally financed through public debt. Another term for public debt is government debt.
4. Financial administration: Financial Administration involves all the activities of finance and taxation. Includes central group for accounting, auditing, and budgeting; the supervision of local government finances; tax administration; collection, custody, and disbursement of funds; administration of employee-retirement systems; debt and investment administration; and the like.
So, in simple words Financial Administration is an all surrounding term for all those functions /operations having the objective to make funds and finance available to the government for its duties and responsibilities to be carried out smoothly and also all those activities that ensure the lawful and efficient use of those funds/finance.

What should be the government activities according to the economist Richard Musgrave?
The economy was proposed by Richard Musgrave, who suggested that government activities could usefully be thought of as having effects on:
“(1) efficient allocation of resources,
(2) Distribution of income, and (3) Macroeconomic stabilization
The first two functions are usually beyond the control of the state or local government and are managed at the national level of government. The third function, allocation, is the basic concern of the local government. The allocation function can be defined in simple words as the provision of socially desirable public goods. The public goods experience two problems. First, it may be impossible to exclude a person from using any service and secondly, too many people may use the service concurrently. When both these characteristics are present, then the good is purely public and is usually financed with taxes. If one or the other characteristic is present, then it may be financed by a quasi price or user charge.

Do you think national defense is public good? Show your argument.
Yes, defense is pure public good.
Public goods are, as defined by economists, non-rival, meaning that the cost of an additional person using the good is zero, and non-excludable, meaning that it is technologically impossible, or prohibitively costly, to prevent people from enjoying the goods. National defense is frequently name as the model example of a pure public good.
Pure public good is one which is 1) Non-rivalry in nature i.e. consumption of this good will not reduce the quantity available for others. All the consumers will consume the same quantity of pure public good.
2) Non- exclusion principle i.e. nobody can be excluded from its consumption whether or not they pay for it.
Public goods create positive externalities i.e. many people will derive benefits from it even if they don't pay. And rationally self interested people will not pay for that they can get without paying for it.
So defense is public good because it is both Non-rivalry and Non-exclusion in nature.

What criteria should be used for the right mix of public and private provision?
Privatization means taking services that are supplied by the government and turning over to the private sector for provision and/or production. What is the right mix of public and private provision? What criteria used to select inputs?
- There are several considerations:
1. Relative wage and materials costs: the less expensive sector is preferred on efficiency grounds.
2. Administrative costs: under public provision, fixed administrative costs are spread over a large group of people.
3. Diversity of Tastes: with diversity, private provision is more efficient because consumption can be fitted into tastes.
4. Distributional issues: community's notion of fairness requires the availability of some goods to everyone.

Briefly describe the elements of cost -benefit analysis.
Definition
Set of procedures for guiding public expenditure decisions

Elements of cost -benefit analysis
1. Concept of Prevent Value
a. Rational decisions require comparing costs and benefits in different time periods
b. Doing this requires use of a Discount Rate or a Premium Rate
c. Discount rate is the rate at which you will trade future money for present money
d. Premium rate is rate at which you will trade present money for future money
e. Generally assume the two rates are the same
f. Inflation –
i. Inflation affects all factors to same percent

ii. Relative positions unchanged iii. Need to use all real or all nominal figures iv. Internal Rate of Return Criteria
1. IRR is discount rate that makes the PV of a project zero
2. Undertake project if the IRR > Interest rate on capital for the project
3. Benefit Cost Ratio
a. Problem classifying things as benefits or costs
b. Taxes
i. If good is subject to taxes such as sales tax, price paid by consumers differs from price received by seller ii. Make same adjustment as in case of monopoly power

Describe the Nature of externality.
Economists generally define an externality as “a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. The cost of an externality is a negative externality, or external cost, while the benefit of an externality is a positive externality, or external benefit.”
Natures of externalities are:
1. An indirect cost, not seen on final price tag of costs and benefits. ex; resulting air pollution or water pollution
2. Externalities can be positive. Ex- price of the vaccination.
3. Public goods can be viewed as a special kind of externality.

How does government can create market for negative externality?
Government can play a role in reducing negative externalities by taxing goods when their production generates spillover costs. This taxation effectively increases the cost of producing such goods. The higher cost, then, better reflects the true cost of production because it includes the spillover costs of, say, pollution. So, such taxation attempts to make the producer pay for the full cost of production. The use of such a tax is called internalizing the externality. For example, let’s assume the cost of producing the widgets noted earlier is two dollars per unit, but an additional 20 cents per unit had been shifted to society as a negative externality in the form of dirty air. The government could place a 20 cent tax on each widget produced to ensure that the firm pays the actual cost of production-which is now two dollars and twenty cents, including the cost of the negative externality. As a result of the higher cost of production, the firm will reduce its production of widgets thus reducing the level of pollution.
Distinguish between Pareto optimality and social optimality:
1. Pareto optimality is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.
The socially optimal is said to exist when resource are allocation of resources not only represents a Pareto optimality but also represent the high level of social welfare.
2. In Pareto optimality no production of commodity can be increased without decreasing production of another commodity.
But in socially optimal production of commodity should be increase without decreasing production of another commodity.
3. In real world Pareto optimality is practices but socially optimal quit impossible to practice.

Define global efficiency. What condition leads to global efficiency?
Global efficiencies are things like only having one group of product procurers for the chain store compared to many buyers doing similar jobs for a series of independent stores or having a centralized supply chain. The global efficiencies of having a single standardized all encompassing bureaucratic procedures for a given service often completely trumps these local inefficiencies. For example, one can compare the provision of health insurance in the Canadian versus American models.
Condition leads to global efficiency:
Global efficiency allows wealthy countries to use their resources - whether labor, technology or capital - more efficiently. Because countries are able with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can.
Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).

Explain the primly determination of economic growth
Economic growth is an increase in real GDP. It means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:
Interest Rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, recently we had a period of zero interest rates, but due to low confidence and reluctant banks growth was still sluggish.
Consumer Confidence. Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending.
Asset Prices. Rising house prices create a positive wealth effect. People can remortgage against the rising value of their home and this encourages more consumers spending. House prices are an important factor in the UK, because so many people are homeowners.
Real Wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending reducing their purchase of luxury items.
Value of Exchange Rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. Depreciation could cause inflation, but in the short term at least it can provide a boost to growth.
Banking Sector. The 2008 Credit crunch showed how influential the banking sector can be in determining investment and growth. If the banks lose money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment.
Levels of infrastructure. Investment in roads, transport and communication can help firms reduce costs and expand production. Without necessary infrastructure it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some unemployed economies.
Human Capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labour productivity can help firms take on more sophisticated production processes and become more efficient.
Development of Technology. In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth.
Other Factors that Can Affect Growth in the Short Term.
Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a shock to growth. It causes SRAS to shift to the left leading to higher inflation and lower growth.
Political Instability. Political instability can provide a negative shock to growth.
Weather. The exceptionally cold December in UK 2010, led to a shock fall in GDP

Part-B

Illustrate the derivation of demand curve for public goods. How can public good efficiency ne achieved?

The derivation of demand curve for public goods
The only way you can derive a market demand curve for public goods is through a survey of the public about how much they would be willing to pay for different quantities of a public good. However, problems such as free-riding and social-loafing make it very difficult, and your estimations will turn out to be biased because most people will have an incentive to hide truly how much they are willing to pay for a public good because they want to be able to enjoy the good for free at someone else's expense. But if you ignore these caveats, You just take different quantities, and sum the price levels that everyone is willing to pay.

For example, at a quantity of 5, lets say person A will pay 3, person B will pay 1, and Person C will pay 5, then the market price at quantity 5 will be 9. This process would need to be repeated for all different quantities until you have a completed demand curve.

How can public good efficiency achieved?
The best place to begin this analysis of public goods efficiency is with the demand for public goods. Because public goods are nontrivial in consumption, everyone can benefit at the same time. As such, the demand for a public good is found by summing the price that each person is willing to pay for a given quantity. In contrast, the demand for private goods is found by summing the quantity that each person is willing to buy at a given price. Public good demand is the vertical summation of individual demand curves and private good demand is the horizontal summation of individual demand curves.
For example: The two people are the cantankerous Roland Nottingham and generally mundane Duncan Thurly. Roland's demand for the good is represented by the top demand curve. Duncan's demand for the good is represented by the lower demand curve. Roland benefits more from the Shady Valley Municipal Park than does Duncan.
In terms of simple equations, public good efficiency is achieved with:
Marginal Cost
=
Roland's Price
+
Duncan's Price
Efficient Production
Fortunately there is an intersection and an analysis of the efficient production of park benches can be informative. The question is: How many park benches should the Shady Valley government produce? Efficiency dictates that the value of the good produced equal the value of goods not produced, which is the opportunity cost. This is achieved at the intersection of the public good demand curve and the marginal cost curve. Click the [Efficiency] button to highlight this point.
In this example, efficiency is achieved if the Shady Valley Municipal Park has 2 park benches per acre. The total value provided by this efficiency level of production is $2 per bench.

What is free ride problem? How can u solve the free ride problem or inefficiency problem in public goods?
A free rider, in economics, refers to someone who benefits from resources, goods, or services without paying for the cost of the benefit. In economics, the free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.
Example: A commonly used example of the economic notion of the free rider problem is found in national defense. All citizens of a country benefit from being defended; however, individuals who avoid taxes are still protected by the same common resource of national defense, even though they did not pay for their fair share of the resource.
Solutions to Free Rider Problem
1. Tax.
One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defence costs £31bn. This results in higher taxes for UK taxpayers. Therefore the cost of national defence is paid indirectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters have tried to withhold a certain % of their tax arguing they don’t want to make contributions to illegal wars. But, most people accept paying taxes.
2. Appealing to People’s Altruism.
For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will be probably be many ‘free riders’ who don’t make donation. But, enough people may be willing to make a donation to fund the cost of the garden / museum. This solution is only effective for services which have relatively low cost. People don’t mind paying £4 if other’s free ride. But, if there was a voluntary donation of £1,000 for national defence, would anyone pay it?
3. Make a Public Good private.
A beautiful garden could be seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good.
4. Legislation
To deal with the free rider problem associated with overconsumption of common resources. The government have tried various options such as:
Quotes – difficult to implement and difficult to monitor
Legislation – on size of net size, number of fishing vessels
Compensation to move away from fishing.
Explain the rationale of government income redistribution.
• Different kinds of social welfare functions
• Utilitarian
• Maximin criterion (Rawlsian)
• Pareto efficient
• Non-individualistic
We have income to provide an incentive for productive (mutually beneficial) exchanges within the economy. People gain purchasing power through labor, and it provides them with incentives to work. If we redistribute income, we diminish that incentive, but only very gradually unless the marginal tax rate is very high.
Redistributing income, while it only has slight costs, has great benefits. The benefits come from the diminishing marginal utility of money. That is, the same amount of additional money is worth more to people who start off with less money. For example, someone who already has a BMW and Mercedes has little interest in a Ford Escort, but someone else who walks for an hour to work and home every day, the car is a valuable purchase indeed.
Since money has diminishing marginal utility, we should take money from the rich and give it to the poor, so long as it doesn't reduce the incentive to work too much. The big question is, what is too much? This, however, is a relatively minor question compared to whether or not to redistribute income at all, and is best answered through experimentation.

Food subsidiary or cash subsidiary which one is better? Explain with example (use relevant graph if require)
It is very difficult to determine which subsidiary is better, because food is basic need on the other hand money is need for all people. But in our country there are so many rich people who really don’t deserve this entire subsidiary. So from my point of view food is better than money as a subsidiary.
A consumption subsidy is one that subsidizes the behaviour of consumers. These type of subsidies are most common in unemployed countries where Governments subsidise such things as food, water, electricity and education on the basis that no matter how poor, all should be allowed those most basic requirements.
Government can create exactly the same outcome through selective tax breaks as through cash payment. For example, suppose a government sends monetary assistance that reimburses 15% of all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is achieved by giving a health tax deduction. Tax subsidies are also known as tax expenditures. Tax subsidies are one of the main reasons for why the tax code is so complicated.
Explain different types of tax base with examples.
Benjamin Franklin once said, "Nothing is certain but death and taxes." Here are the 7 types of taxes base:-.
Taxes Paid by the Individual
1. Income Taxes: These taxes are paid out by anyone who earns an income by any means. Income taxes are subject to deductions and tax credits; they are usually not paid by people under a certain income or who have special situations such as a disability.
2. Property Taxes: These are paid by anyone who owns property such as land, a home or commercial real estate. These taxes are often collected by the state and county to help fund their budgets. Licensing fees on cars, recreational vehicles and watercraft are property taxes as well.
3. Consumptive Taxes: These are taxes on sales goods or items that are subjected to being used by either an individual or business. While everyone understands that a small amount of money is added on to the purchase of goods in the stores, many people overlook other taxes. Fishing or hunting license is a tax. Toll road fees are a tax, even if they call it a user fee. So are travel fees.

Taxes Paid by Businesses
4. Corporate Taxes: All business structures pay taxes on the income made in that particular business. Tax consequences are important when structuring a business. For example, sole proprietorships will pay their taxes through their regular income taxes, 5. Payroll Taxes: These taxes are taken out by the businesses before income is distributed to the individual in exchange for the work that was done. This is an additional cost of having an employee, and one reason why "independent contractors" have become so popular. These payroll taxes must be paid by the individual contractor if the regular business is not paying them.
 Other Types
6. Capital Gains taxes are paid on investments that have appreciated. Frequently these investments have been sold. Examples would be stocks, bonds, and real estate. Most losses can be "written off" on the federal income tax level, and like corporate taxes, these are usually best handled by professional tax preparers.
7. Inheritance or Estate Taxes: Of the 7 types of taxes, this is the only type where a tax can happen because of a death. A certain amount of estate money that may be passed on with no tax consequence. Once that level is met, however, the taxes are usually quite steep. Life insurance is often used to offset inheritance taxes, and is one reason insurance is so critical in estate planning.

What do you mean by incidence of taxation? Explain with graph the income effect and substitution effect of income tax and consumption tax.
Incidence of taxation An economic term for the division of a tax burden between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax. For example, the demand for cigarettes is fairly inelastic, which means that despite changes in price, the demand for cigarettes will remain relatively constant. Let's imagine the government decided to impose an increased tax on cigarettes. In this case, the producers may increase the sale price by the full amount of the tax. If consumers still purchased cigarettes in the same amount after the increase in price, it would be said that the tax incidence fell entirely on the buyers.
Income effect and substitution effect of income tax and consumption tax.
Substitution effect is the change in consumption patterns due to a change in the relative prices of goods. For example, if private universities increase their tuition by 10% and public universities increase their tuition by only 2%, then it is very likely that we would see a shift in attendance from private to public universities.

The change of relative prices is the substitution effect (steep line to dotted line) and the change of purchasing power is the income effect (dotted line to parallel solid line)
The income effect is the change in consumption patterns due to the change in purchasing power. This can occur from income increases, price changes, or even currency fluctuations. Since income is not a good in and of it. For example, a decrease in the price of all cars allows you to buy either a cheaper car or a better car for the same price, thus increasing your utility. Goods typically fall into one of two categories: normal and inferior. These categorizations relate consumption of a good with a particular individual’s income. Normal goods increase in consumption as income increase while inferior goods decrease as income increases. Also, some goods can be normal or inferior only on certain ranges of an income spectrum. For example, education is a normal good: as one’s income increases (family income), demand for education increases.

Is it possible to provide public goods by private enterprise? Give your justification.
No, it is almost impossible to provide public goods by private enterprise
A public good is a good that is both non-excludable and non-rivalries in those individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. Public goods that are available everywhere are sometimes referred to as global public goods.
A private good is the opposite of a public good. Examples of private goods include food, airplane rides and cell phones. Private goods are less likely to experience the free rider problem because a private good has to be purchased - it is not readily available for free. A company's goal in producing a private good is to make a profit. Without the incentive created by revenue, a company is unlikely to want to produce the good.
Other than that for manufacture public goods it needs huge money which is quit impossible for a private sector to finance. Other hand if defense or police goes to private sector that they become manipulates and cannot serve public fairly. So, it is almost impossible to provide public goods by private enterprise

Briefly explain the income distribution as an externality.
Negative externalities:
The Income distribution can decrease the supply of a good that produces negative externalities by placing a tax on that good. This increases production costs and discourages production. The government can also restrict output of the good using some method of direct control, such as passing legislation capping how many of that good can be sold. This hurts society more than private companies; part of the reason we outsource a lot of production to china.
Positive externalities:
Let’s take the example of vaccines, to get production up to the necessary point, the Income distribution can increase the supply of vaccines by subsidizing production. This decreases production costs and encourages producers to make more of their good. It can also increase the demand by requiring vaccines for children to attend public schools.

What are the factors determined the actual level of real capital formation without full employment situation.
Capital as a factor that affecting economic growth and employment situation.
The factors that determined the actual level of real capital formation without full employment situation are:-
The low level of capital formation in unemployed countries is caused by low saving ability.
Low saving ability is caused by low income levels.
Low levels of income caused by low productivity.
The low level of productivity will lead to low incomes and low investment.
Low level of investment due to the ability of low capital formation.
The world economy experts agreed that in the process of economic development in unemployed countries should be able to beat large enough to crack the vicious circle of poverty. One way that can be done to achieve that goal is by the formation and development of investment and workforce skills development so as to increase productivity and ultimately their incomes will increase. Without being able to do capital formation and investment, economic growth in unemployed countries will remain behind.

During the full employment situation, how capital formation is effected by the tax.
Capital as a factor that affecting economic growth and employment situation and also tax.
During the full employment situation, capital formation is effected by the tax such as:
The high level of capital formation in employed countries is caused by high saving ability so tax is increase high saving ability is caused by l high income levels increase tax revenue
High levels of income caused by high productivity. increase corporate tax revenue
The high level of productivity will lead to high incomes and high investment. increase corporate tax revenue high level of investment due to the ability of high capital formation increase corporate tax revenue

Identify and write the rational wheatear the following is pure public or private good,
Name
Category
Rational
Road and highways
Pure public goods
1) Non-rivalry in nature i.e. consumption of this good will not reduce the quantity available for others. all the consumers will consume the same quantity of pure public good.

2) Non- exclusion principle i.e. nobody can be excluded from its consumption whether or not they pay for it.
Internet service
Private goods
Characteristics of private goods include excludability, rivalry and finally reject ability. for example: preventing those who have not paid for it from using the good or consuming its benefits
Bangladesh railway
Pure public goods
1) Non-rivalry in nature i.e. consumption of this good will not reduce the quantity available for others. all the consumers will consume the same quantity of pure public good.

2) Non- exclusion principle i.e. nobody can be excluded from its consumption whether or not they pay for it.

2009

What do you mean by pure public good? Do you thins National defense is a pure public good? Show your answer.
Public finance
Public finance is known as public sector economics or public economics focus on the taxing and spending activities of government and their influence on the allocation of resources and distribution of income.
Public finance is the study of the role of the government in the economy. It is the branch of economics which evaluate the government revenue and government expenditure of the public authorities and the modification of one or the other to achieve desirable effects and avoid undesirable ones.
Do you think national defense is public good?
Yes, defense is pure public good.
Public goods are, as defined by economists, non-rival, meaning that the cost of an additional person using the good is zero, and non-excludable, meaning that it is technologically impossible, or prohibitively costly, to prevent people from enjoying the goods. National defense is frequently name as the model example of a pure public good.
Pure public good is one which is 1) Non-rivalry in nature i.e. consumption of this good will not reduce the quantity available for others. All the consumers will consume the same quantity of pure public good.
2) Non- exclusion principle i.e. nobody can be excluded from its consumption whether or not they pay for it.
Public goods create positive externalities i.e. many people will derive benefits from it even if they don't pay. And rationally self interested people will not pay for that they can get without paying for it.
So defense is public good because it is both Non-rivalry and Non-exclusion in nature.

What is government budget? What kind of budget would you prefer for the country like Bangladesh? Why?
A government budget is a government document presenting the government's proposed revenues and spending for a financial year that is often passed by the legislature, approved by the chief executive or president and presented by the Finance Minister to the nation. The budget is also known as the Annual Financial Statement of the country. This document estimates the anticipated government revenues and government expenditures for the ensuing (current) financial year
What kind of budget would you prefer for the country like Bangladesh? Why?
For the country like Bangladesh we need deficit budget. Some of the advantages of a budget deficit include improved checks and balances in government expenditure due to scarcity money and it provides quick cash from increased borrowing, which can be used to carry out various developmental projects fast.

Explain the principal of Taxation
Principles of taxation are the fundamental concepts used by the government in implementing a fair taxation system in the country. The taxation principles include a sufficient amount of taxes that can be used in providing basic services to the citizens. Another principle of taxation is that it should cover all sectors of society in order to reduce its concentration in only one sector of society.
1. Efficient - A tax system should raise enough revenue such that government projects can be adequately sponsored, without burdening the economy too much (not particularly the tax payer), as not to become a disincentive for performance (internal and external investment, work returns and savings).
2. Understandable - The system should not be incomprehensible to the layperson, nor should it appear unjust or unnecessary complex. This is to minimize discontent and costs.
3. Equitable - Taxation should be governed by people's ability to pay, that is, wealthier individuals or firms with greater incomes should pay more in tax while those with lower incomes should pay comparatively less.
4. Benefit Principle - Those that use a publicly provided service (which is funding primarily through taxation) should pay for it! However, conflicts in principle may and often do arise between this and principle 2.

Explain the concept of efficiency and optimality in resources. Which factor is to be considered in the allocation of resource?
Resource efficiency is Maximizing the supply of money, materials, staff, and other assets that can be drawn on by a person or organization in order to function effectively, with minimum wasted effort or expense. Pareto optimality is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.
We should accept Pareto optimality
It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. If economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement—an increase in Pareto efficiency: through reallocation, improvements can be made to at least one participant's well-being without reducing any other participant's well-being.
It is important to note, however, that a change from an inefficient alloca tion to an efficient one is not necessarily a Pareto improvement. Thus, in practice, ensuring that nobody is disadvantaged by a change aimed at achieving Pareto efficiency may require compensation of one or more parties. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive and more efficient, the monopolist will be made worse off. However, the loss to the monopolist will be more than offset by the gain in efficiency. This means the monopolist can be compensated for its loss while still leaving a net gain for others in the economy, a Pareto improvement.

Define externality. How can a government create a market for negative externalities?
Externality is an effect of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative. In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit
Negative Externalities and Government Intervention
One common approach to adjust for externalities is to tax those who create negative externalities. Examples of Environmental Taxes include some of the following
The Landfill Tax - this tax aims to encourage producers to produce less waste and to recover more value from waste, for example through recycling or composting and to use environmentally friendly methods of waste disposal.
The Congestion Charge: -this is a high profile environmental charge introduced in February 2003. It is designed to cut traffic congestion in inner-London by charging motorists £8 per day to enter the central charging zone.
Plastic Bag Tax: A tax on plastic bags in Wales has seen the number given away drop by sizeable amounts according to this news report Since 1 October 2011, there has been a minimum charge of 5p on all single use carrier bags. The Welsh government acted in a bid to encourage re-use of bags and therefore lower demand for single-use free bags. The justification was on economic and environmental grounds:
Vehicle excise duty (VED): Also known as ‘road tax’ – VED starts from a theoretical 'nil' rate and accelerating up depending on the carbon emissions of the vehicle

Mention the Impact of direct tax and indirect tax on tax-payer
Direct Tax: Direct taxes are those taxes which are paid entirely by those persons on whom they are imposed. The burden cannot be shifted to others in case of direct tax. Such as: Income tax. Tax burden cannot be shifted so it is not popular.
Indirect Tax: indirect taxes are those taxes which are imposed on sales or purchase of any kind of goods or services. Here the burden is ultimately shifted to others. Such as: VAT.

Short Note:
Public Finance: Public finance is known as public sector economics or public economics focus on the taxing and spending activities of government and their influence on the allocation of resources and distribution of income.
Public finance is the study of the role of the government in the economy. It is the branch of economics which evaluate the government revenue and government expenditure of the public authorities and the modification of one or the other to achieve desirable effects and avoid undesirable ones.

Cost benefit analysis: Cost–benefit analysis (CBA), sometimes called benefit–cost analysis (BCA), is a systematic process for calculating and comparing benefits and costs of a project, decision or government policy (hereafter, "project"). CBA has two purposes:
1. To determine if it is a sound investment/decision (justification/feasibility),
2. To provide a basis for comparing projects. It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.[1]
CBA is related to, but distinct from cost-effectiveness analysis. In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their "net present value."

Economic effect on income: In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service. The relationship between income and the quantity demanded is a positive one, as income increases, so does the quantity of goods and services demanded. For example, when an individual's income increases, other things remaining the same, that person will demand more goods and services; thus increasing their consumption. The degree to which a person or economy will spend more of their income on consumption is called the marginal propensity to consume (MPC). The MPC depends on the individual's or economy's saving characteristics.

Part-B

Define the term “good governance”
Good governance is an indeterminate term used in international development literature to describe how public institutions conduct public affairs and manage public resources. Governance is "the process of decision-making and the process by which decisions are implemented (or not implemented)". The term governance can apply to corporate, international, national, local governance [ or to the interactions between other sectors of society.
Develop a model to establish the good governance in Bangladesh
For establishing the good governance in Bangladesh it have to maintain and establish following aspect and relationship: between governments and markets, between governments and citizens, between governments and the private or voluntary sector, between elected officials and appointed officials, between local institutions and urban and rural dwellers, between legislature and executive branches, and between nation states and institutions.
The varying types of comparisons comprising the analysis of governance in academic and practical discussion can cause the meaning of "good governance" to vary greatly from practitioner to practitioner

Discuss the role of Anti –Corruption commission (ACC) in attaining good governance in our country.
Anti Corruption Commission Bangladesh often abbreviated: ACC was formed through an act promulgated on 23 February 2004 that into force on 9 May 2004.
The role of Anti –Corruption commission (ACC) in attaining good governance in our country are:
To enquire into and conduct investigation of offences mentioned in the schedule
To file cases on the basis of enquiry or investigation and conduct cases
To hold enquiry into allegations of corruption on its own motion or on the application of aggrieved person or any person on his behalf
To perform any function assigned to Commission by any Act in respect of corruption
To review any recognized provisions of any law for prevention of corruption and submit recommendation to the President for their effective implementation
To undertake research, prepare plan for prevention of corruption and submit to the President, recommendation for action based on the result of such research
To raise awareness and create feeling of honesty and integrity among people with a view to preventing corruption
To organize seminar, symposium, workshop etc. on the subjects falling within the functions and duties of the Commission
To identify various causes of corruption in the context of socio-economic conditions of Bangladesh and make recommendation to the President for taking necessary steps
To determine the procedure of enquiry, investigation, filing of cases and also the procedure of according sanction of the Commission for filing case against corruption and
To perform any other duty as may be considered necessary for prevention of corruption.

“Tax is compulsory payment of a person to the government defray the expenses incurred in the common interest of all, without reference to special benefit” –Explain.
Oxford Dictionary defines a ‘tax’ as a “contribution levied on persons, property or business for support of government”. Professor Seligman suggests that a tax is a compulsory contribution from a person to the government to defray the expense incurred in the common interest of all, without reference to special benefits conferred. It is a compulsory levy imposed on the nationals and residents to meet expenses which are incurred by a government for the common cause.

Tax is generally referred to as a compulsory levy by the government upon assessment of various categories. It is a compulsory levy payable by an economic unit to the government without any corresponding entitlement to receive a definite and direct quid pro quo from the government.
The above definitions points out or encompasses three main characteristics of the tax and the following deserves mention:

a) Tax is not levied for a return for a specific service rendered by government to taxpayers. An individual can not ask for any special benefit from the government in return for the tax paid. It is referred to as a non-quid-pro quo payment.
b) It is a compulsory contribution imposed by the government on people or companies. Because of its compulsory nature, those who do not pay it are reliable to being punished but it is to be paid by those who come under its jurisdiction.1
c) It is a payment by taxpayers which is used to benefit all the citizens whereby the government uses the collected revenues to establish infrastructures such as hospitals, schools as well as other public utility services.

Explain the Major determination of economic growth
Economic growth is an increase in real GDP. It means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:
Interest Rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, recently we had a period of zero interest rates, but due to low confidence and reluctant banks growth was still sluggish.
Consumer Confidence. Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending.
Asset Prices. Rising house prices create a positive wealth effect. People can remortgage against the rising value of their home and this encourages more consumers spending. House prices are an important factor in the UK, because so many people are homeowners.
Real Wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending reducing their purchase of luxury items.
Value of Exchange Rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. Depreciation could cause inflation, but in the short term at least it can provide a boost to growth.
Banking Sector. The 2008 Credit crunch showed how influential the banking sector can be in determining investment and growth. If the banks lose money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment.
Levels of infrastructure. Investment in roads, transport and communication can help firms reduce costs and expand production. Without necessary infrastructure it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some unemployed economies.
Human Capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labour productivity can help firms take on more sophisticated production processes and become more efficient.
Development of Technology. In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth.
Other Factors that Can Affect Growth in the Short Term.
Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a shock to growth. It causes SRAS to shift to the left leading to higher inflation and lower growth.
Political Instability. Political instability can provide a negative shock to growth.
Weather. The exceptionally cold December in UK 2010, led to a shock fall in GDP

Is their any Link between Pareto optimality and Social Optimality?

Concept of Pareto optimality and Social Optimality
Link
1. Pareto optimality is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.
The socially optimal is said to exist when resource are allocation of resources not only represents a Pareto optimality but also represent the high level of social welfare.
They both concern with allocation of resources in the society.
2. In Pareto optimality no production of commodity can be increased without decreasing production of another commodity.
But in socially optimal production of commodity should be increase without decreasing production of another commodity.
They both concern with the production of commodity.

What are the significant consideration in cost and benefit analysis?
Significant consideration in cost and benefit analysis are describe in the below. CBA attempts to measure the positive or negative consequences of a project, which may include:
1. Effects on users or participants
2. Effects on non-users or non-participants
3. Externality effects
4. Option value or other social benefits.
A similar breakdown is employed in environmental analysis of total economic value. Both costs and benefits can be diverse. Financial costs tend to be most thoroughly represented in cost-benefit analyses due to relatively abundant market data. The net benefits of a project may incorporate cost savings or public willingness to pay compensation (implying the public has no legal right to the benefits of the policy) or willingness to accept compensation (implying the public has a right to the benefits of the policy) for the welfare change resulting from the policy. The guiding principle of evaluating benefits is to list all (categories of) parties affected by an intervention and add the (positive or negative) value, usually monetary, that they ascribe to its effect on their welfare.
The actual compensation an individual would require to have their welfare unchanged by a policy is inexact at best. Surveys (stated preference techniques) or market behavior (revealed preference techniques) are often used to estimate the compensation associated with a policy; however, survey respondents often have strong incentives to misreport their true preferences and market behavior does not provide any information about important non-market welfare impacts.

How can government influence the income distribution?
Government influence the income distribution through:-
Increasing or decreasing tax rate
Increasing or decreasing the interest rate
Increasing or decreasing the investment opportunity
Changing the price level of luxurious goods
Changing loan price
Give or withdrawing barriers on import and export
Providing subsides or tax exemption or holiday to a particular area.
Other than is there are many techniques that government can use to influence the income distribution
Views about fairness are important because a major function of present-day governments involves changing the distribution of income from what the market would give. One reason why governments take from some and give to others is that the unmet goals of some, the needy, are deemed more important than the met goals of others. When people support policies that alter the distribution of income, politicians will respond by enacting them.

What do you mean by full employment of resource? What steps are to be taken to ensure full employment of resource?
An economy cannot be efficient if it is not using the resources available to it to the limit. Full employment is the condition that exists when all available resources are engaged in the production of goods and services. In other words, all resources that could be used for production are being used.
What steps are to be taken to ensure full employment of resource
Full employment is achieved in principle when all available resources (labor, capital, land, and entrepreneurship) are used to produce goods and services. This goal is commonly indicated by the employment of labor resources (measured by the unemployment rate). However, all resources in the economy--labor, capital, land, and entrepreneurship--are important to this goal. The economy benefits from full employment because resources produce the goods that satisfy the wants and needs that lessen the scarcity problem. If the resources are not employed, then they are not producing and satisfaction is not achieved.
Consider the two basic political philosophies--liberals and conservatives.

Liberals: Those who comprise the working class and occupy the lower end of the income spectrum, tend to favor the pursuit of full employment more than most. They are the ones most likely harmed by unemployment and thus to benefit from full employment. Liberal politicians count these folks among their core constituency.

Conservatives: Those who own businesses and are on the employer side of labor markets tend to be less inclined to think full employment is a beneficial state of the economy. Because everyone already has a job, full employment makes it more difficult and costly to hire new workers. A little bit of unemployment tends to make hiring easier. Conservative politicians count these folks among their core constituency.

State the impacts of income redistribution.
The redistributive effect of tax and benefit systems depends heavily on the way in which income is defined, we have income to provide an incentive for productive (mutually beneficial) exchanges within the economy. People gain purchasing power through labor, and it provides them with incentives to work. If we redistribute income, we diminish that incentive, but only very gradually unless the marginal tax rate is very high.
Redistributing income, while it only has slight costs, has great benefits. The benefits come from the diminishing marginal utility of money. That is, the same amount of additional money is worth more to people who start off with less money. Impacts of income redistribution are:
Cross-country comparability of income distributions can be improved by using an extended income concept – because of differences in consumption patterns, housing markets and provision of public services.
The overall redistributive effect of tax and benefit systems depends heavily on the income concept considered; and the differences across countries are smaller when considering the extended income distribution.
The common use of a narrower income concept, such as disposable income, can lead to the overestimation of the redistributive effect of tax and benefit systems (in relative terms), the extent of this varying across countries.

Define budget. Mention the main items of expenditure in the and capital account of the budget of the government.

Definition of 'Budget'
An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another. main items of expenditure
Public Program budgets: These are costs due to specific public policy programs. Examples include welfare programs (e.g. entitlements); medical programs; environmental programs; housing programs; education programs.
Capital budgets: These are costs due to specific capital projects. Examples include infrastructure (highway, sewage, water, utilities, etc.) costs; building costs.
Debt servicing: Repayment of borrowings
Administration: Personnel and other general costs
Main item of capital account
At high level:

Breaking this down:

Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account. If a nation's citizens are investing in foreign countries, that's an outbound flow that will count as a deficit.
Portfolio investment refers to the purchase of shares and bonds. It's sometimes grouped together with "other" as short term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any buying or selling of the portfolio assets in the international capital markets.
Other investment includes capital flows into bank accounts or provided as loans. Large short term flows between accounts in different nations are commonly seen when the market is able to take advantage of fluctuations in interest rates and / or the exchange rate between currencies
Reserve account. The reserve account is operated by a nation's central bank to buy and sell foreign currencies; it can be a source of large capital flows to counteract those originating from the market.

Short Notes:
Global Efficiency
Global efficiencies are things like only having one group of product procurers for the chain store compared to many buyers doing similar jobs for a series of independent stores or having a centralized supply chain. The global efficiencies of having a single standardized all encompassing bureaucratic procedures for a given service often completely trumps these local inefficiencies. For example, one can compare the provision of health insurance in the Canadian versus American models.

Utility possibility frontier
In welfare economics, a utility–possibility frontier (or utility possibilities curve), is a widely used concept similar to the better-known production–possibility frontier. The graph shows the maximum amount of one person's utility given each level of utility attained by all others in society. Suppose that society were made up of just two people, I and J, and that all the assumptions of perfect competition held. The curve below would then show all the combinations of I’s utility and J’s utility that were possible given their society’s resources and technology.
Normative and Subjective approach
Normative approach : A theoretical, prescriptive approach to sociological studies that has the aim of appraising or establishing the values and norms that best fit the overall needs and expectations of society.
Subjective approach
A Subjective Approach is when the outcomes do not have the same probability of occurrence. For example you have 90% (0.9) to pass your exam, therefore you have 10 %( 0.1) to fail. The probability of failing and passing is different so the above example is an example of a subjective approach.

Revenue Structure: A description of how a business will earn income, produce profits and generate a higher than average return on investment. In business, a revenue model is generally used for mid and long-term projections of a company's profit potential and operation.
Public good, private goods and public expenditure:
Public goods are, as defined by economists, non-rival, meaning that the cost of an additional person using the good is zero, and non-excludable, meaning that it is technologically impossible, or prohibitively costly, to prevent people from enjoying the goods. National defense is frequently name as the model example of a pure public good.
A private good is the opposite of a public good. Examples of private goods include food, airplane rides and cell phones. Private goods are less likely to experience the free rider problem because a private good has to be purchased - it is not readily available for free. A company's goal in producing a private good is to make a profit. Without the incentive created by revenue, a company is unlikely to want to produce the good.
Public expenditure: Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc