Choose and answer any three of the following six questions. Of the three you answer, at least one must come from among questions 1-3 and at least one from among questions 4-6. Each answer should be between 250 and 500 words.
1) Governments are often justified, from an economic perspective, as being able to correct market failures. Discuss what might cause market failures and whether or not each of the factors underlying market failure might also influence the ability of a government to correct them. Does this give reason to believe that government failure is also a relevant concern?
2) What is the difference between Pareto Efficiency and Kaldor-Hicks Efficiency? Illustrate the difference with a simple example.
3) What is meant by the term "marginal cost of government funds?" Why is it such an important concept?
4) Quite a number of fiscal scholars have claimed that high marginal tax rates, combined with a deduction for charitable contributions, are good for charities, and on these grounds a number of charities have lobbied in opposition to reductions in marginal tax rates. The basis for this claim is that, the higher the marginal tax rates, the lower the "price" of making a charitable contribution. A 20 percent tax, for instance, means that the price of giving $1 to charity is 80 cents, whereas this price would be 50 cents if the marginal tax rate were 50 percent. This kind of reasoning might seem to suggest that 100 percent marginal taxation would be better for private charities than zero marginal taxation. Critically analyse this conclusion.
5) Political economist Henry George (1839-1897) argued that the inefficiencies of taxation could be eliminated by taxing the rent on unimproved land. Summarize this idea using the framework of optimal tax theory.
6) During the early 1980s, the US government proposed a radical "flattening" of the tax schedule faced by ordinary US income tax payers. A very finely gradated tax schedule with very high top marginal tax rates was replaced with one that included just three marginal tax rates; 0, 15 and 28%. What might explain the fact that this new tax schedule generated essentially the same revenue as the previous more steeply progressive tax schedule?