QUESTION ONE
a) Explain any 5 (five) canons of public expenditure.
Public expenditure refers to government spending on goods and services for the public welfare.
The canons of public expenditure are principles that guide the allocation of public resources.
These include:
1. Canon of Need: Public expenditure should be directed toward meeting the needs of
society. It ensures that spending is aligned with essential services such as healthcare,
education, and infrastructure.
2. Canon of Economy: This emphasizes that the government should spend public funds in
the most efficient manner. It involves minimizing waste and ensuring value for money in
public expenditure.
3. Canon of Efficiency: Public expenditure should contribute to maximizing the benefits
relative to the costs incurred. It ensures that the resources used for public spending
provide the best possible outcome for society.
4. Canon of Equity: Public spending should be done in a way that promotes fairness and
reduces inequality. This involves ensuring that resources are distributed in a way that
benefits the most vulnerable groups in society.
5. Canon of Transparency: Governments should be open and transparent about how public
funds are spent. Transparency builds trust and ensures that the public is aware of how
their tax money is being utilized.
b) Explain the effects of increased government expenditure on an economy.
Increased government expenditure can have several effects on an economy, both positive and
negative:
1. Stimulates Economic Growth: Increased spending on infrastructure, health, and
education can boost economic activities, leading to higher GDP growth.
2. Boosts Employment: Government spending on projects like construction can create jobs,
reducing unemployment.
3. Inflationary Pressure: If the economy is already at full capacity, increased spending can
lead to inflation as demand outstrips supply, causing prices to rise.
4. Crowding Out: Higher government spending may lead to higher interest rates, which
could discourage private investment. This is particularly the case if the government
borrows to finance its spending.
5. Improved Public Services: Increased expenditure can enhance public goods and
services, improving the overall welfare of the population.
c) Describe at least four causes of market failure.
Market failure occurs when the allocation of goods and services by a free market is inefficient.
Some of the causes include:
1. Externalities: This occurs when the production or consumption of goods and services
affects third parties, either positively or negatively. For example, pollution from factories
is a negative externality.
2. Public Goods: Public goods, like national defense, are non-rival and non-excludable,
which means individuals cannot be excluded from using them and one person’s use does
not reduce availability for others. This often leads to under-provision in the private
market.
3. Imperfect Competition: When firms have monopoly or oligopoly power, they can
restrict output and increase prices, leading to inefficiency and suboptimal distribution of
goods.
4. Information Asymmetry: When one party in a transaction has more or better
information than the other, it can lead to suboptimal decisions. For example, in the
market for used cars, sellers may have more information about the quality of the car than
buyers.
d) Explain five distinctions between public goods and private goods.
1. Excludability: Private goods are excludable, meaning that people can be prevented from
using them unless they pay (e.g., a car). Public goods are non-excludable, meaning that
people cannot be excluded from using them (e.g., clean air).
2. Rivalry: Private goods are rival, meaning that one person's consumption reduces the
availability for others (e.g., a sandwich). Public goods are non-rival, meaning that one
person’s consumption does not diminish another’s ability to consume (e.g., street
lighting).
3. Provision: Public goods are usually provided by the government, while private goods are
provided by individuals or firms in a market system.
4. Pricing: Private goods are sold in the market with a price tag, while public goods are
typically funded through taxes and are provided free of charge to users.
5. Consumption Benefits: Private goods benefit only the consumer who pays for them,
while public goods provide benefits to society as a whole, not just individuals.
e) Describe five canons of a good tax system.
A good tax system ensures that taxes are collected efficiently and equitably. The five canons
include:
1. Canon of Equity: The tax system should be fair and just, ensuring that individuals
contribute according to their ability to pay. This can involve progressive taxation.
2. Canon of Certainty: The tax system should provide clarity about the tax rate, the base of
taxation, and the method of collection, so taxpayers can understand their obligations.
3. Canon of Convenience: The system should be convenient for both the taxpayer and the
government. The time and cost of tax payment should be minimal.
4. Canon of Economy: The costs of collecting taxes should be low. This means minimizing
administrative costs and ensuring that the tax system is not burdensome.
5. Canon of Simplicity: The tax system should be simple to understand, without complex
rules and loopholes, so taxpayers can comply without confusion.
f) Define externality and name the three types of externalities.
An externality is a side effect or consequence of an economic activity that affects other parties
who did not choose to be involved in that activity. The three types of externalities are:
1. Negative Externality: This occurs when the activity imposes costs on third parties. For
example, pollution from factories affects the health of nearby residents.
2. Positive Externality: This occurs when the activity provides benefits to third parties. For
example, a well-maintained garden in a public area can increase the beauty of the
neighborhood for everyone.
3. Network Externality: This occurs when the value of a good or service increases as more
people use it. For example, social media platforms become more valuable as more people
join and interact.
g) Discuss non-excludability and non-rivalry characteristics of public goods.
Public goods are characterized by non-excludability and non-rivalry:
1. Non-excludability means that it is impossible or highly costly to exclude people from
using the good. For example, once national defense is provided, everyone in the country
benefits, even those who do not contribute to its funding.
2. Non-rivalry means that one person's use of the good does not diminish the availability of
the good for others. For example, one person benefiting from clean air does not reduce its
availability to others.
This should guide you through answering question one. Let me know if you need help with any
other questions!
