FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT OF ECONOMICS ECONOMICS 310 MAY EXAMINATION 27 MAY 2010 Total: 75 marks

s Time: 120 minutes Examiners: Dr N Monkam Mr FJ Scholtz Prof JH van Heerden External examiner: Prof E Calitz

Question 1 Multiple Choice 1.1 As resources are shifted from one industry to another this can be shown by: a) An inward shift of the contract curve b) A movement along the production possibility curve c) An outward shift of the production possibility curve d) A widening of the Laffer curve e) None of the above. 1.2 Any combination of products inside the production possibility curve is: a) Allocatively inefficient b) X inefficient c) Allocatively efficient d) A sign of an excess burden in the economy e) Consumer inefficient 1.3 If the price in a market is fixed by the government above equilibrium: a) There is excess burden b) There is excess supply c) There is excess demand d) There is tax incidence e) There is a shortage of goods

1.4

Merit goods are: a) Not provided in the free market economy b) Underprovided in the free market economy c) Over provided in the free market economy d) Freely provided in the free market economy e) None of the above

1.5

Which of the following is the government most likely to subsidise? a) Negative externalities b) Positive externalities c) Monopolies d) Goods in elastic supply e) Goods in elastic demand

1.6

An expansionist fiscal policy could include: a) Lower interest rates b) Increased lending by the banks c) An increase in corporation tax d) A change in the inflation target e) A decrease in VAT

1.7

If the marginal tax rate is 20% and a consumers income increases from R10 000 to R12 000: a) The amount of tax paid will increase by R240 b) The amount of tax paid will increase by R200 c) The total amount of tax will be R2000 d) The total amount of tax will be R2400 e) None of the above

1.8

Tax efficiency has to do with the lack of: a) Statutory incidence b) Economic incidence c) An excess burden d) Horisontal inequity e) Vertical inequity

1.9

The Laffer curve shows: a) The relationship between elasticity of demand and tax revenue b) The relationship between elasticity of supply and tax revenue c) The relationship between income and tax revenue d) The relationship between tax rates and tax revenue e) None of the above.

1.10

Which of the following statements is true: a) Public goods could only be supplied by the government b) Excess burden is smaller with elastic demand curves c) A selective tax usually causes an excess burden d) Pigouvian taxes on externalities are not used in practice e) Statutory incidence means the State must collect the tax. [10]

Question 2 Tax Table Write the numbers of the relevant blocks of the Table below in your answer sheet, as well as the number of facts required as given in brackets. Each fact counts one mark. For example, 1 (2) means it is the first question and you should write down two facts for two marks..The grey blocks without numbers in them are not applicable to this question. Table 1. Elements of a good tax applied to various taxes. Equity Definition PIT CIT CGT Wealth tax Inheritance tax VAT 1 (2) 4 (2) Economic efficiency 2 (1) Administrative efficiency 3 (1) 6 (1) 7 (2) 8 (1) 9 (1) 10 (1) 11 (1) 12 (1) [16] Flexibility

5 (1)

Question 3 Describe (and substantiate your answer by using a graph) what the effect of a chemical plant polluting an adjacent river would be on the welfare experienced by society. Indicate on your graph what the cost(s) of such an action would be to the overall society (and especially the downstream users of the river water). [6] Question 4 4.1 Briefly discuss the composition of the present South African government expenditure as recorded on the 2010/2011 national budget. What are the highest priority areas in terms of the functional classification of expenditure? (3) Briefly discuss three theoretical justifications that could be found in the literature that provides a proper justification for the expansion in government functions in the South African economy over the past three decades. (6) [9] Question 5 Explain (and substantiate your answer with a graph), what the effect of the tax rate is on the excess burden. In illustrating your answer, explain what effect halving a proposed tax rate increase would have on excess burden as well as on the prospective tax revenue. [10]

4.2

Question 6 Mr Julius Malema and the ANC Youth League are serious about their plea that the South African mines should be nationalised. You will be their representative economist when this issue is to be debated with Mr Phosa and Mr Zuma. Use your knowledge of privatisation and production possibility curves to build a case in favour of the nationalisation of mines. [12] Question 7 With the recent economic turmoil in the Eurozone threatening to impact on the rate of the economic recovery in South Africa, you are commissioned to advise the South African government on an appropriate fiscal policy stance to enhance the rate of economic recovery as far as possible. Do so by elaborating on the available fiscal policy goals and the available instruments, as well as the most appropriate actions to be taken against this backdrop. [12]