Public Finance Flashcards
7 cards from real CBE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Public Finance flashcards as text
A carbon tax is best justified in public finance as a corrective measure for:
Answer: Negative production externalities not reflected in market prices
A carbon tax is a Pigouvian tax designed to internalize the negative externality (pollution/climate damage) that markets fail to price, correcting the market failure.
Which of the following is an example of a 'horizontal equity' violation in taxation?
Answer: Two families with identical incomes pay different taxes due to different tax treatment of their income sources
Horizontal equity requires that taxpayers in equal economic positions bear equal tax burdens; different tax treatment of identical incomes from different sources violates this principle.
The 'excess burden' (deadweight loss) of a specific tax on a good is minimized when:
Answer: The taxed good has the most inelastic supply or demand
Deadweight loss is minimized by taxing goods with inelastic supply or demand (the Ramsey rule), because behavioral distortions—and thus efficiency losses—are smallest for inelastic goods.
A government introduces a means-tested cash transfer program where benefits are reduced by $0.50 for every dollar earned. The implicit marginal tax rate on earnings for recipients is:
Answer: 50%
A benefit reduction rate of $0.50 per dollar earned creates an implicit 50% marginal tax rate, as recipients effectively lose half of each additional dollar earned.
In the theory of public expenditure, which condition describes the Samuelson optimality rule for pure public goods?
Answer: The sum of all individuals' marginal rates of substitution equals the marginal rate of transformation
Samuelson's rule states the efficient level of a public good occurs where the sum of individual MRS (marginal willingness to pay) across all consumers equals the MRT (marginal cost of production).
Which of the following best describes the 'benefit principle' of taxation?
Answer: Taxpayers should contribute based on the benefits they receive from government services
The benefit principle holds that individuals should pay taxes in proportion to the benefits they receive from government spending, similar to market pricing of private goods.
A local government issues general obligation bonds to fund a new school. Unlike revenue bonds, general obligation bonds are backed by:
Answer: The full faith and taxing power of the issuing government
General obligation bonds are secured by the issuer's pledge to use its taxing power to repay bondholders, making them generally lower-risk than revenue bonds tied to specific project income.