Introduction PE 4

• Socialistic countries.

• Different kinds of economies?

  • QUAD - Japan, Australia, Russia, India and USA
  • BRICS

• The question: Why are certain things only done by the government (e.g. goods and services like highways, education, unemployment insurance) and others are taken up by private industries?

  • Overhead cost is very high (e.g. flights)

• Examples of sectors that are owned by the government but is run by the government.

  • Sea Ports
  • IRCTC
  • Roads

• We will note that in railway tickets, only 50% of the fare was covered by the charge to the customer.

• Most of the work of the government is outsourced

  • Income tax filing website was updated by Infosys
  • E.g. Dell

• How do we fund that expenditure?

  • Why are the tax rates set by the current minister? Reason behind the numbers.
  • MAT: Minimum Alternative Tax

• Margaret Thatcher, the first women prime-minister of UK introduced the concept of Lump Sum Tax.

  • It doesn’t create Debt Weight Loss or excess burden
  • But not equitable

• Are indirect taxes equitable

  • Excise:
  • Customs: for those which are being important

• What are the goods that don’t come under GST?

  • Unbranded products
  • Liquor
  • Petroleum

• Liquor and petrol doesn’t come under GST, because it gives the maximum revenue for the state.

  • The price for petrol in Karnataka is 107 but in Goa its 98.
  • The difference in price arises because the price control is in the hands of the government
  • Had it been GST, it would be the same across all states.
  • For the state its a win-win situation because the revenue is high. This is possible because these goods are inelastic goods (in the short run).
  • What’s the reason that GST hasn’t been able to cover it?
    • Because of the composition of the GST council
    • The state has a majority in the council.

• When you talk about finance, “Public” means government (Central, State and Local).

  • “Finance” means monetary flows represented by the revenue and the expenditure activities of the governmental fiscal policies

Government functions discussed:

1. Allocation (Public Finance)
2. Distribution (Public Finance)
3. Stabilization (Microeconomics)
4. Regulation (Law)

Three functions of the government

---

Allocation

The process of dividing the total use of resources¹ between private and social goods, and choosing the mix of social goods. The government provides social goods because they cannot be provided by the market system².

• How does the government know what to provide if there is no preference revelation?
  • There is a manifesto.
    • How does voting happen? Based on the promises he provides. (Sitaraman provided free bus rides to women and thus all of the women voted for him)
    • Based on the votes, if he wins, the buses are made free. If he doesn’t win, meaning people don’t want that bus rides should be free.
    • In Switzerland, everyone votes (what is it called?)

Distribution

The process of adjusting the distribution of income or wealth to ensure it conforms to what society considers fair. For example, improvements in health care facilities benefit the sick, the old, and those about to have children.

• 80-20 rule: 80% of the wealth is with 20% of the people
• What is poverty and how is it defined objectively?
  • Calory intake
  • How to calculate poverty? (see multidimensional poverty index)
    • Tendulkar committee

Stabilization

The process of supporting the achievement of macroeconomic objectives, such as economic growth, price stability, and sustainable external accounts.

• Interface between fiscal and monetary policy.
• Why did Harjit Patel resign?

The government may need to intervene in the market to guide, correct and supplement it when markets fail to achieve an efficient allocation of resources. This can happen in cases of incomplete information, incomplete markets, public goods, externalities, macroeconomic imbalances, and failure of competition.³

Questionswhat

---

• What’s the surcharge for Income Tax?
• What’s sess?
• What are these: Public account, consolidated funds and consistency funds?
• What are the types of taxes that need to be put?
• Different types of taxes under central list, state list and concurrent list?
• What are the issues that the finance commission has to sort out?
• What is equity and efficiency? (Book: I BA)
  • What’s the tradeoff between them?
  • Allocative efficiency.
  • Equity: Just and Fair
• What is priority-wise lending?
• UGC has introduced a program very recently (today is Dec 13th, 24)
• Free-rider problem: Want to enjoy but don’t want to pay for it. Because of this there is no preference revelation.

Footnotes

1. human resources, money resources ↩

2. They have to provide it as a welfare motive ↩

3. Information asymmetry is also a reason for market inefficieny. ↩