Mangalayatan University Online

Assignment- Sem-1, July 2023 Batch

Maximum Marks: 30,

Last Date of Submission: 15 June 2024

Learner Name: Gavva Venkateswar Rao

Enrollment No: 22301937
Course Name: Public finance
Course Code: ECO(1201)
Date of Submission: 15.06.2024
Note- The assignment Question have 5 Sections/Blocks. Kindly attempt Any ONE question from Each
of the 5 blocks. Each question carries equal marks. For Eg:

Block 1 Attempt- Question 1a or 1b

Block 2 Attempt- Question 2a or 2b

Block 3 Attempt- Question 3a or 3b

Block 4 Attempt- Question 4a or 4b

Block 5 Attempt- Question 5a or 5b

……………………………………………………………………………………………………………….

Type your assignment here…

or

You mayattach handwritten assignment also ….

Block1-Q1

what is the fiscal policy and function and how it is followed by government

Fiscal policy refers to the government's use of taxation, government spending,

and borrowing to influence the economy's overall level of economic activity,
employment, and inflation. It is one of the primary tools governments use to
achieve macroeconomic objectives and manage economic fluctuations. Here's a
breakdown of fiscal policy and its functions:

Objectives of Fiscal Policy:

Economic Growth: Fiscal policy aims to stimulate economic growth by increasing

aggregate demand through government spending on infrastructure, education,
healthcare, and other productive areas.

Price Stability: Governments use fiscal policy to control inflation by adjusting

taxes and spending to moderate demand pressures and prevent excessive price
increases.

Employment: Fiscal policy can be used to promote full employment or reduce

unemployment by increasing government spending on job creation programs or
providing incentives to businesses to hire more workers.

Income Distribution: Fiscal policy plays a role in promoting income equality by

implementing progressive taxation and social welfare programs to redistribute
wealth and support disadvantaged groups.

Tools of Fiscal Policy:

Government Spending: Governments can increase or decrease spending on

goods and services, infrastructure projects, healthcare, education, defense, and
social welfare programs. Increased government spending stimulates aggregate
demand and economic activity.

Taxation: Governments can adjust tax rates, exemptions, and deductions to

influence disposable income and consumption. Cutting taxes can boost
consumer spending and investment, while raising taxes can reduce inflationary
pressures and fund government programs.

Borrowing: Fiscal policy involves government borrowing through the issuance of

bonds and securities to finance budget deficits. Borrowing allows governments
to fund spending when tax revenues are insufficient and manage debt levels
over time.

Functions of Fiscal Policy:

Stabilization: Fiscal policy acts as a stabilization tool to counter economic

fluctuations. During recessions, governments may increase spending and cut
taxes to boost demand and support economic recovery. Conversely, during
periods of high inflation or overheating, governments may reduce spending and
raise taxes to cool down the economy.

Resource Allocation: Fiscal policy allocates resources to priority areas such as

infrastructure, healthcare, education, and defense based on government
priorities and societal needs. It influences the distribution of resources across
sectors and regions.

Income Redistribution: Fiscal policy redistributes income through progressive

taxation, social welfare programs, subsidies, and transfer payments. It aims to
reduce income inequality and provide support to low-income households, the
elderly, disabled individuals, and other vulnerable groups.

Budgetary Control: Fiscal policy involves budgetary planning, execution, and

monitoring to ensure fiscal discipline, transparency, and accountability in
government finances. It sets fiscal targets, manages deficits, controls public
debt, and evaluates the efficiency of public spending programs.
Governments implement fiscal policy through annual budgets, legislative
measures, fiscal rules, and coordination with central banks and other economic
institutions. Fiscal policy decisions are based on economic indicators, forecasts,
political priorities, and public policy goals to achieve sustainable economic
growth, stability, and social welfare.

Block 2 Q2a

explain public goods and its characteristics

Public goods are goods and services that are non-excludable and non-rivalrous
in nature. This means that once provided, they are available for everyone to
use, and one person's use of the good does not diminish its availability for
others. Public goods are typically provided by governments or public entities
because they have characteristics that make it difficult for private markets to
efficiently provide them. Here are the key characteristics of public goods:

Non-Excludability: Public goods are non-excludable, which means that

individuals cannot be excluded from using the good once it is provided. This is
because it is difficult or impractical to prevent people from benefiting from the
good, even if they do not pay for it. For example, national defense is a public
good because it protects all citizens regardless of whether they contribute taxes
to fund it.
Non-Rivalrousness: Public goods are non-rivalrous, meaning that one person's
consumption of the good does not reduce the amount available for others to
consume. In other words, the use of the good by one individual does not
diminish its utility or value to others. For example, street lighting is a public
good because one person's enjoyment of well-lit streets does not diminish the
lighting available to others.

Joint Consumption: Public goods are often consumed jointly by a large number
of individuals simultaneously. This joint consumption contributes to the non-
rivalrous nature of public goods because the consumption of the good by one
person does not interfere with others' ability to consume it as well.

Non-Excludability Leads to Free-Rider Problem: The non-excludable nature of

public goods can lead to the free-rider problem, where individuals can benefit
from the good without paying for it. Since people cannot be excluded from
using public goods, there is little incentive for individuals to voluntarily pay for
their provision, leading to underproduction or underinvestment in public goods
by the private sector.

Examples of Public Goods: Common examples of public goods include national

defense, public parks, street lighting, clean air, and public infrastructure like
roads and bridges. These goods benefit society as a whole and contribute to the
overall well-being and functioning of communities.

Role of Government: Due to the challenges associated with the provision and
funding of public goods through private markets, governments often step in to
provide and finance these goods using tax revenue, public funds, or other
mechanisms. Government intervention ensures that public goods are
adequately provided to benefit society and address market failures related to
public goods.

Block 3 Q3b

justify pollution permits and its regulation

Pollution permits, also known as emissions trading systems or cap-and-trade

programs, are regulatory mechanisms designed to control pollution levels
effectively while allowing flexibility for industries to reduce emissions at lower
costs. Justifying pollution permits and their regulation involves several key
considerations:

Economic Efficiency: Pollution permits promote economic efficiency by allowing

market forces to determine the most cost-effective ways to reduce pollution. By
setting a cap on total emissions and issuing permits that can be bought, sold, or
traded, businesses have an incentive to innovate and adopt cleaner
technologies to reduce their emissions. This encourages the achievement of
pollution reduction goals at the lowest possible cost to the economy.

Incentives for Innovation: Pollution permits create incentives for innovation and
technological advancement in pollution control measures. Companies that can
reduce emissions below their allocated permits can sell their surplus permits to
others, creating a financial incentive for investments in cleaner production
processes, renewable energy, and pollution abatement technologies.

Flexibility and Adaptability: Pollution permits offer flexibility and adaptability to

changing economic and environmental conditions. As the economy grows or
contracts, permit allocations can be adjusted to reflect changing emission levels.
Additionally, permit trading allows companies to respond to changes in market
conditions and operational needs, optimizing their emission reduction
strategies.

Environmental Effectiveness: Pollution permits contribute to environmental

effectiveness by setting a clear cap on total emissions, ensuring that overall
pollution levels are reduced to desired targets. The cap-and-trade system
encourages continuous improvement in environmental performance as
companies strive to stay within their allocated permits or invest in additional
permits to meet regulatory requirements.

Revenue Generation: Pollution permits can generate revenue for governments

through the sale of permits or auctioning of emission allowances. This revenue
can be reinvested in environmental protection programs, renewable energy
initiatives, climate adaptation measures, and public infrastructure
improvements, contributing to sustainable development goals.

International Cooperation: Pollution permits and cap-and-trade systems can

facilitate international cooperation on environmental issues, such as climate
change. Countries can participate in emissions trading schemes, allowing for the
harmonization of emission reduction efforts across borders and promoting
global collaboration in addressing environmental challenges.
Regulatory Certainty: Pollution permits provide regulatory certainty for
businesses by establishing clear emission targets, compliance requirements, and
monitoring mechanisms. This certainty reduces uncertainty and investment
risks, encouraging long-term planning and strategic decision-making in pollution
management.

Overall, pollution permits and their regulation offer a balanced approach to

environmental protection, economic growth, and technological innovation,
providing a framework for achieving sustainable development goals while
minimizing adverse impacts on businesses and the economy.

Block4-Q4

difference between forward and backward shifting

The concepts of forward and backward shifting are often discussed in the
context of economics and taxation, particularly when analyzing the effects of
taxes on market outcomes and economic agents. Here's a breakdown of the key
differences between forward and backward shifting:

Forward Shifting:
Definition: Forward shifting refers to the situation where a tax burden is shifted
forward to consumers in the form of higher prices for goods and services.

Mechanism: When a tax is imposed on a producer or supplier, they may choose

to pass on the burden of the tax to consumers by increasing the price of the
goods or services they offer. This increase in price reflects the added cost of the
tax to the producer.

Impact on Consumers: Consumers bear the ultimate burden of the tax in the
form of higher prices. They end up paying more for the same goods or services,
effectively absorbing the tax increase.

Example: If the government imposes a tax on cigarettes, tobacco companies

may raise the prices of cigarettes to cover the tax cost, leading to consumers
paying higher prices for cigarettes.

Backward Shifting:

Definition: Backward shifting occurs when the tax burden is shifted backward to
producers or suppliers in the form of reduced profits or lower wages.

Mechanism: When a tax is levied on a product or activity, producers may absorb

the tax cost by reducing their profit margins or by lowering wages for workers.
This is done to avoid passing the tax burden onto consumers and risking lower
demand due to higher prices.

Impact on Producers: Producers bear the direct burden of the tax through
reduced profits or lower wages. They may adjust their production costs, output
levels, or labor costs to offset the impact of the tax.

Example: If a government imposes a tax on luxury cars, car manufacturers may

choose to absorb the tax cost by reducing their profit margins on luxury car
sales or by adjusting wages for employees involved in luxury car production.

In summary, the key difference between forward and backward shifting lies in
the direction of the tax burden. Forward shifting involves passing the tax burden
to consumers through higher prices, while backward shifting involves absorbing
the tax burden within the production or supply chain through reduced profits or
wages. The actual shifting dynamics can vary depending on market conditions,
elasticity of demand, production costs, and competitive factors.

Block5-Q5a

clarify the current problems in Indian tax system

As on now , the Indian tax system faces several challenges and issues that
require attention and reform. Here are some of the key problems in the Indian
tax system:

Complexity and Compliance Burden: The Indian tax system is complex, with
multiple layers of taxes including income tax, goods and services tax (GST),
customs duties, excise duties, and state-level taxes. The complexity of tax laws
and compliance requirements often burdens taxpayers, especially small and
medium-sized enterprises (SMEs) and individual taxpayers, leading to
compliance challenges and administrative costs.

Tax Evasion and Black Money: Tax evasion and the generation of black money
remain significant challenges in India. Some taxpayers engage in tax avoidance
schemes, underreporting income, or using illicit means to evade taxes, leading
to revenue losses for the government and distortions in the tax base.

Taxation of Agriculture Income: Agriculture income is largely exempt from

income tax under the Income Tax Act. However, there have been debates and
discussions regarding the taxation of agricultural income above a certain
threshold to broaden the tax base and promote equity in taxation.
GST Implementation Challenges: While the introduction of GST was a significant
tax reform aimed at simplifying indirect taxation and creating a unified national
market, the implementation process faced initial challenges such as technology
issues, compliance complexities, rate rationalization, and administrative
coordination between central and state authorities.

Tax Disputes and Litigation: India's tax administration system is often criticized
for tax disputes, litigation, and lengthy legal processes. Taxpayers may face
uncertainties, delays, and administrative burdens due to tax assessments,
appeals, and disputes with tax authorities, impacting business operations and
investment climate.

Tax Incentives and Exemptions: The Indian tax system provides various tax
incentives, exemptions, and deductions to promote investments, industrial
development, and specific sectors. However, the proliferation of tax incentives
without periodic reviews and sunset clauses can lead to revenue leakages,
inefficiencies, and distortions in resource allocation.

Taxation of Digital Economy: With the growing prominence of digital

transactions, e-commerce, and digital services, there are challenges in taxing
the digital economy effectively. Issues such as determining tax jurisdiction,
addressing cross-border transactions, and ensuring fair taxation of digital
platforms and multinational companies (MNCs) require international
cooperation and policy frameworks.

GST Rate Structure: The GST rate structure with multiple tax slabs (e.g., 5%,
12%, 18%, and 28%) has been a subject of debate, with calls for simplification,
rationalization, and possible convergence towards fewer tax rates. Streamlining
the GST rate structure could enhance compliance, reduce classification disputes,
and improve the ease of doing business.

Addressing these challenges in the Indian tax system requires comprehensive

reforms, including simplification of tax laws, enhancing tax administration
efficiency, promoting digital tax compliance mechanisms, addressing tax
evasion and avoidance, rationalizing tax incentives, and fostering a conducive
tax environment for economic growth and investment. Ongoing efforts by
policymakers and tax authorities aim to address these issues and improve the
effectiveness and fairness of the Indian tax system.