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SVKM'S NMIMS
SARLA ANIL MODI SCHOOL OF ECONOMICS
Academic Year: 2018-2019

Program: B.Sc Economics Year: 11 Semester: IV

Subject: Public Finance and Policy Batch: 2017-20

Date: 13th April, 2019 Time: 01.00 pin -03.00.pin (2 hrs)
Marks: 50 No.of pages:|23
Final Examination
• Instructions:
1. Attempt any 5 out of 6 questions.
2: Each question carries ten marks,
3g Figures to the ri.ght indicate maximum marks.
4. Answer each question on a fresh page,
5. Answer all sub-parts together.
'` Attempt any 5 out of the following 6 questions.

10
Q1. A. Assume that the demLand forgoing to hospitals is given by p=10-2q and the society's
marginal cost curve is given by p=2q. The individuals are insured and do not have to
pay anything for the visits. Derive and show the number of visits to hospitals by the
individuals and the welfare loss in a figure. Explain. (3)

B. Explain `Flat of the curve' ,phenomena. (2)

C. Consider an economy with two people, A & a, and two commodities, tea and bread.
Currently, A.& 8 both would be willing to substitute two cups of tea for one bread.
Further, if the economy were to produce one less cup of tea, the resources released
from tea. production could be used to produce these breads. Is the allocation of
resources in this economy Pareto efficient? lf not, should there be more tea or more
breads? (2.5)
D. Consider the two projects, a research and development program (R&D) and an
advertising campaign. Both require an initial outlay of 1000 rupees. The R&D program
produces a return of 1200 rupees at the end of the first year,1600 at the end of the
second year and 2000 rupees at th.e end of the third year. The advertising campaign,
on. the other harid, had a. payoff of 1400 rupees in the first year, zero rupeesin the
second year, and 2000 rupees in the third year. The discount rate could be either 10
per cent or 50 per cent for both R&D and advertising. Calculate present values given
different discount rates. and compare which project is more preferable and admissible.
(2.5)

Q2. 10

A. Acid rain is an example of a negative externality that Spills across national boundaries.
India,is facing an increasing threat from acid rain-earlier believed to be the scourge pf
the west. Already a low pH has been observed at Chembur, Maharashtra (Mohan ahd
Kumar, 2017).Show with the help of a diagram, which public solution (taxes qr quantity
regulation) will be mo;e appropriate to address this problem. (4)
8, A Competitive refinery releases one unit of waste into the atmosphere for each unit of

lj'3
 refined product. The inverse demand function for the refined product is pd =24-q, which
represents the marginal benefit curve where q is the quantity produced when the
consumers pay price pd. The inverse supply curve for refining is MPC=2+q, which
reperesents the marginal cost curve when the industry produces q units. The marginal
external cost curve is MEC=0.5q, where MEG is the external cost when the industry
releases q units of waste. Marginal Social Cost is given by MSC= MPC + MEC. What
are the equilibrium price and quantity for the refined product when there is no
correction for the externaljty?(2)How much of the refined product should the market
supply at the social optimum. (1)How large is the deadweight loss from the
externality?(1.,5)Suppose the government imposes an emission fee of T per unit of
emissions. How large must be the emission fee be if the market is to produce the

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Q3. A. How is the provisioning of public goods different from private goods? Explain using the
10
optimality conditions and also give justification for the same. (5)
a.Whatjssuesariseduringtheprovisioningoffreewaterandhealthcareservicesbythe 5==
welfare government. Explain using appropriate diagram. (5)

Q4. The city of Arizona has seven voters with heterogeneous preferences for Public transport system. The
localgovernmentdecidestousemaj.orityvotingruletodecidewhjchpublictransportatjonprojectwouldbe 10
takenup.Therearethreeoptionsavailable:R(Monorail-expensive),M(Metro-mediumlevelofexpense),
and 8 (Bus servi.ce-low level of expense) .
Theseindividualsrankthe{;=;zgtjonsinthefoMowingway.
Voter 1 : R >8 >M
Voter 2: R> M > a
Voters: a > M >R .
Voter 4: M> a >R

¥::::8:#>P R? 6?in
Voter 7: M}R?B-. T in ? R`> a

A. State three necessary ponditjons of majority voting.(3)

a.Sketchthepreferencesbasedonaboveinformationtoassessifthepreferencesgeneratesingle
beak. or d.ouble peak, (3)
C.ConsideraHseriesofpair-wisevotesanddiscusstheoutcome.(2)
D.Willanyprojectbechosenbyamajorityvoterule?If so,whichone?Ifnotexplainwhyitwould
happen. Also, discuss any alternative approach that can produce a consistent outcome. (2)

Q5. A. Suppose that the income tax in a certain nation is computed according to the foHowing
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tax brackets,10 per cent for income up to $9,325,15 per cent for income $9,326 to
$37,950,25percentforjncome$37,951to$91,900,28%$91,901to$191,650,33per
cent for income $191,651 to $416,700 , 35 per cent for income $416,701 to $418,400 ,
39,60 pe`r cent for income $418,401 or more. A & a are the two individuals who live in
this nation and their annual income is $62,000 and $1,20,000 respectively. Compute
their marginal and average tax rates. (3.5)
a. Kentucky's House Bill 366, passed in 2018 broadened the sales and income tax bases
and lowers the corporate and individual income tax rates. Among other changes, most
significantisanincreaseofthecigarettetaxfrom$0.60to$1.10per20-countpackof
cigarettes. Use a general equilibrium framework,to discuss the possible incidence of a
tax on c.igarettes.(6.5)
2,,4
 Q6. A. Charles Tiebout's suggestion that people "vote with their feet" for commuhities with 10

optimal bundles of taxes and public goods has played a central role in local public
' finance for over 50 years. Tiebout by suggesting a comptetitve market of juridisctions

` tends to solve a preference revelation and preference aggregation problem present in

Lindahl pricing. Do you agree? Elaborate your answer. (5)
8. State of Neonvi][e wants to improve sanitation facilities by funding local infrastructure
through conditional block grant. IIIustrate the same using community indifference
curves and the ]oca[ governmeht budget constraint and discuss is it possible to
maximize the welfare gains to communities through this type of grant. (5,)