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MEC-106: Public Economics

MEC-106: Public Economics

IGNOU Solved Assignment Solution for 2022-23

If you are looking for MEC-106 IGNOU Solved Assignment solution for the subject Public Economics, you have come to the right place. MEC-106 solution on this page applies to 2022-23 session students studying in MEC courses of IGNOU.

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Assignment Code: MEC-106/TMA/2022-23

Course Code: MEC-106

Assignment Name: Introduction to Biological Anthropology

Year: 2022-2023

Verification Status: Verified by Professor


Answer all the questions.


Section A


Answer the following questions in about 700 words each. 20x2


Q1) Define and elaborate the term ‘Global Public Goods’? How are millennium development goals are associated with GPG? Explain knowledge as a GPG.

Ans) Since everyone on earth might easily profit from knowledge for both the individual and society, knowledge has long been acknowledged as a universal public good. But as people become more enlightened, they find a lot of products that are available everywhere. In actuality, they span national and international borders. Global and transnational public goods have increased as a result of globalisation and the dissolution of many nations. Only recently have we become more conscious of them. First off, many actions now have international or worldwide implications thanks to new products and technologies.


Recall that the usage of chlorofluorocarbons and related substances for cleaning, propulsion, and refrigeration was widespread. They have reduced the ozone levels in the stratosphere, increasing the amount of UV light that people are exposed to globally. However, as techniques for locating cross-border problems improved, so did our understanding of the global implications of these concerns. This includes maintaining harmony, safety, a clean environment, reducing climate change, halting ozone layer loss, etc. They are anticipated to cover all continents, groups of people, and generations.


Millennium Development Goals as Global Public Goods

Knowledge as GPG

The ability to create, assimilate, and disseminate knowledge is directly related to socioeconomic progress. Many thinkers have observed that knowledge is a commodity that is very distinct from other commodities after analysing the economic properties of knowledge. On the one hand, it is produced with competition in mind. On the other hand, it is uncommon for persons who create knowledge to be able to hold it exclusively for their own benefit for an extended period of time. This indicates that neither intellectual property rights nor industrial or military secrecy can, over time, obstruct the spread of knowledge.


Many people who create information disseminate their findings solely for the gratification of having their accomplishments recognised and their reputations improved. In actuality, their activity's main objective is to spread knowledge. It is difficult to distinguish between knowledge that is "private" or "public," "national" or "global." When these problems have normative ramifications, such as whether knowledge should be produced for the benefit of all, the argument on them is frequently intense. These problems are not just theoretical; they also have significant policy ramifications with broad practical applicability. These are possible questions to ask.

  1. What extent should the rights to intellectual property of innovators and creators be protected by public institutions, laws, and standards?

  2. Should academic institutions and universities benefit from the ideas they produce?

  3. Should academics and students from competing nations be given unrestricted access to the knowledge produced in national institutions?


Only a few features of a public good apply to knowledge, especially given that it is non-rivalrous in consumption. There are institutional and economic strategies that might make knowledge excludable, but they are never completely successful. When knowledge is applied on a turnkey basis, that is, when users are not required to comprehend how it operates and how it was created, knowledge is extremely near to being a pure public good.


Users typically need to learn how to use knowledge, and the more sophisticated and complicated the knowledge, the more time and resources will need to be expended. Even when information is freely usable in certain situations, it can only be employed if the respective costs can be paid. Knowledge differs from public goods because of its dispersion process rather than the process through which it is produced. In conventional economic theory, this element has not received much attention.


Q2) Discuss the public debt situation of India. How can the deficit in the government budget be financed? How does the concept of debt sustainability work?

Ans) Public debt is another name for government debt. Public deposits, internal public debt, and external public debt are the three categories of what are generally referred to as government liabilities. In India, deposits that take the form of money and reserves are managed as public accounts. These are raised on the inside as well as the outside. "External loans/debt" refers to borrowing from foreign governments, multilateral organisations, and commercial financial institutions.


Public Debt in India

The "union government" of India issues both long-term "bonds" and short-term "treasury bills." Only bonds referred to as "State Development Loans" are issued by state governments. There are three different Treasury Bill maturities: 91, 182, and 364 days. They are designed to meet urgent needs in the near term. Dated securities have a half-yearly interest payment schedule and a fixed or fluctuating coupon rate. The maturation period ranges from 5 to 40 years. They are currently up for sale on the E-Kuber platform, where a select group of institutions known as "primary members" may bid.


Commercial banks, urban cooperative banks, insurance firms, and provident fund organisations make up the majority of the members. Any individual—natural or legal—can purchase them. Commercial and cooperative banks favour government debt instruments because they are practical tools for meeting their "statutory liquidity requirement."


Treasury bills and dated securities are referred to as "market loans" or "marketable debt" combined. Their sale or purchase by the government is referred to in monetary economics as "open market operations." The phrase "nonmarketable internal debt" is used to describe special securities and intermediate securities with a maturity of 14 days.


States in India also have their own public accounts for things like trusts, endowments, insurance funds, pension funds, and provident funds. Long-term debt makes over 80% of India's total national debt. The total public debt as a share of GDP is roughly 50%. The FRBM Act in India has a long-term objective of bringing this down to 40%.


In addition to the aforementioned, RBI offers "ways and means advances" to the federal and state governments to cover shortfalls in cash. This is more of a type of overdraft than debt. Only the union government is authorised to issue external public debt. Our external public debt hasn't been particularly high lately. However, it is essential for some initiatives when we need to purchase technology or look for technological transfers and our exports and remittances cannot cover them.


Debt Sustainability

Modern organisations must take on debt and the risk of failure, which results in non-performing assets. Lending institutions add a risk premium to the interest rate as compensation for this. To determine the "weight of debt," a differentiation is made when speaking of the government.


Tax revenue is the main source of income for the government, therefore if the economy is performing well, tax revenue will likely be higher and continue to rise over time. Even though a government can get by on its present earnings, it may choose to borrow money to pay for long-term projects. The issue of who should really finance and service the debt arises because long-term projects also benefit future generations.


There will always be those who hold "bonds and bills" and people who don't among the total population. Take internal debt as an example. Assuming that everyone pays taxes, taxpayers are responsible for paying the debt, while bondholders benefit. Since owning bonds is entirely optional, lending money to the government is not required, although paying taxes is. Due to their preference for government bonds over private securities, institutions willingly buy debt bonds.


With available debt, the government can avoid raising taxes. However, it is sometimes maintained that if public debt is used in conjunction with tools like the statutory liquidity ratio, private investment may be crowded out. However, there is also the opposing argument that, in many instances, public investment would encourage private investment by creating better opportunities.


As a result, there is no actual hardship associated with governmental debt. However, it is up to future generations to pay off the debt. However, the current generation also gains if public debt supports entitlement programmes. Future generations gain if infrastructure spending is supported. In light of these, the government must balance the debt's burden with variables like the rate of return and the maturity time to prevent the debt from becoming too onerous for people who must pay it back.


Section B


Answer the following questions in about 400 words each. 12x5


Q1) Explain collective decision making with the help of majority voting and median voter theorem.

Ans) The principle of collective decision-making aids us in choosing which services should be given in the public sector and what taxes should be levied. This choice has an impact on an individual's welfare, which is dependent on how the community distributes its resources.


Majority Voting

One instance of a common choice is voting. It is the method by which a group makes a choice. Stability, which refers to the tendency of the decision-making process to eventually reach a definite result and not fluctuate between options, is a significant issue of collective choice. The splintered results our electoral system produces when no single party wins a clear majority help us understand the significance of "stability." A coalition may offer a stable administration, but this is a communal decision made by choosing leaders with different viewpoints in order to achieve a shared social objective.


The Arrow's Impossibility Theorem offers a middle result of the theory of social choice. According to the theorem, it is impossible to design a group decision-making procedure that meets all conditions while still meeting a few reasonable needs. Voting by majority is perfectly acceptable when there are only two options available, but when there are more, things can get complicated. The situation is comparable to both a two-party system that produces a clear winner and a multi-party system where too many parties must join together with a minimally similar agenda in order to create a coalition.


Median Voter Theorem

An extremely unique set of personal preference combinations are necessary for the existence of a Condorcet winner. We have a solution to this thanks to the "median voting theorem." According to the theorem, under two assumptions, a "majority rule voting" system will choose the result that the median voter values the most. Two things about voters' preferences are single-peaked and they can categorise all election choices into a one-dimensional spectrum. An extra presumption of "single crossing preference" is also made in one of its other versions. The median position is a Condercet winner under both circumstances, which leads to the same result.


There are a lot of problems with the median voter theorem. The first is that in order for the median to have a majority, the theorem must be applied with an odd number of voters. Theorem remains mute regarding which of the two central voters will ultimately be selected, despite the fact that there is a median tendency, when there are an equal number of voters. The second and most important flaw is that the theorem can only be used when voting is taking place on a single dimension of the decision.


Q2) Explain the theory of fiscal federalism and discuss the inter-governmental transfers in India.

Ans) The theory of fiscal federalism assumes that a federal system of government can be efficient and effective at solving problems governments face today, such as just distribution of income, efficient and effective allocation of resources, and economic stability. Economic stability and just distribution of income can be done by federal government because of its flexibility in dealing with these problems. Because states and localities are not equal in their income, federal government intervention is needed. Allocation of resources can be done effectively by states and local governments. Musgrave argued that the federal or central government should be responsible for the economic stabilization and income redistribution but the allocation of resources should be the responsibility of state and local governments.


Inter-Governmental Transfers in India

Typically, the Union transfers resources to the Units. In India, it signifies:

  1. Union to States

  2. Union to Local Governments through States

  3. State to Local Governments


Further, transfers from:

  1. Union to States are executed through Finance Commission and Union Ministries.

  2. Union to States through recommendations of Central Finance Commission and from State governments to Local Governments through respective State Finance Commissions.


Central Finance Commission

In India, the percentage of the States' share from the centre has gradually increased in recent decades from 29 to 29.5 to 30.5 to 32.0 and 42.0 percent, respectively. The criteria that have emerged for horizontal imbalance correction have changed. In this regard, there have been two main arguments:

  1. Units with higher densities ought to have higher shares.

  2. States with greater areas ought to make up more of the total.


While these criteria are deserving in and of itself, emphasis has also been paid to states with a higher population density than those with a lower density.


Union Ministries

The Union ministries are classified as either Concurrent Lists, State Lists, or Union Lists. Concurrent Lists contain a lot of traditional State territory. They operate a number of programmes either alone or in collaboration with State governments. The programmes can be broadly categorised into two groups: central sector programmes and centrally sponsored programmes.


The former ones are typically found in places on the Union List, and they are developed, carried out, and fully supported by Union Ministries. These latter are created by a Union Ministry but implemented by State Governments and fall under the category of State or Concurrent List. CSS funding is split between the Union government and relevant State governments in proportion to the amount of money that each government transfers to the relevant implementing organisations. The CSS are in the fields of village roads, wildlife, irrigation, housing, child development, and so forth.


State Finance Commissions

Even though they must be established every five years, State Finance Commissions are not consistently established on time. As a result, certain States have received their reports from 4th SFCs while others have received their reports from 5th SFCs, including Sikkim and Kerala. Additionally, the overall outlook on SFCs is not promising.


Q3) Define Externalities. Explain how externalities lead to market failure. How does a negative production externality allocate resources inefficiently? Use appropriate diagram to support your answer.

Ans) An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.


Externalities lead to market failure because a product or service's price equilibrium does not accurately reflect the true costs and benefits of that product or service. Equilibrium, which represents the ideal balance between buyers' benefits and producers' costs, is supposed to result in the optimal level of production. However, the equilibrium level is flawed when there are significant externalities, creating incentives that drive individual actors to make decisions which end up making the group worse off. This is known as a market failure.


A negative production externality allocate resources inefficiently. A negative externality occurs when an economic transaction imposes a cost to an uninvolved third party. A negative externality occurs when the social cost is greater than the production cost or private cost. This means that there is a total negative effect imposed on society from economic activity.


Example: Fossil fuel energy producers fail to take into account the social cost from the production of energy (most often relating to fossil fuel combustion). The failure to consider the negative effects can increase or prolong the deadweight loss in a market. If the deadweight loss is large enough this can lead to a market failure.


Due to the large amount of pollution from the generation of electricity using fossil fuels such as coal and the negative effects its causes on society as a whole there is a social cost inflicted.


To correct the negative effects of the pollution generated by electrical production, the government can implement a number of policies for example it could levy a tax on pollution and emissions from plants that produce it. A tax would bring P1 up to P2, the socially efficient price. The revenues collected from the tax can be used to subsidize renewable energy initiatives, promote the development of new, low-carbon technologies or increase healthcare spending to cope with increased illness resulting from pollution among other things.


To remediate a failing market, governments attempt to prevent the market from producing inefficient outcomes by affecting the price or quantity creating the externality, thus minimizing the negative effects. Due to firms and consumers do not always take into account the social cost, government policies can be used to incentivize or in some cases force firms and consumers to make decisions that account for the social cost, most often this takes the form of regulations. This can 'protect' the market from failure and help ensure an efficient allocation of goods and services in a market.


Q4) Define Public Goods. Elaborate the features of a public good. Show the efficient provision of a public good as per the Lindahl’s equilibrium model.

Ans) A very extreme instance of externality is public goods. Pure public goods are those that lack two characteristics that characterise private goods. First, their consumption patterns are non-rival, which means that when one consumer consumes an item, the amount still remains available for consumption by other customers. For instance, if one person uses a streetlight, others have access to it as well. Another instance is fresh air. Additionally, public goods cannot be excluded. This indicates that everyone can access it.


Features of a Public Good

  1. It is neither excludable nor competitive. Due of these qualities, it is challenging for market producers to sell the good to individual customers.

  2. Nonexcludable refers to a good that makes it difficult or expensive for one user to bar another user from utilising it.

  3. When a good is non-rivalrous, it does not restrict other people from using it.


Lindahl’s Equilibrium Model

In a market, buyers pay a single price, but according to their individual demand schedules, they obtain varying quantities of the good. Total supply of the good is the sum of the individual quantities. Everybody receives the same amount of a pure public good, and the aggregate also stays the same. We can anticipate that various consumers will pay different rates for a public commodity because their demand schedules vary.


It would cost money because there would need to be a lot of public goods created. Different consumer-citizens could be forced to share the cost of manufacturing. However, the allocation rule cannot be the same everywhere. Knut Wicksell argued that each public good should be funded by a distinct, identifiable tax, and that the amount to be provided should be decided by consensus among all of the society's members. The Voluntary Exchange Model refers to this. Eric Lindahl contributed to the idea.


A theoretical economic situation known as the Lindahl equilibrium occurs when the ideal amount of public goods are generated, and their costs are fairly distributed among all parties. Everyone agrees on the quantity that should be produced since they demand the same amount of the common good. According to the marginal advantage they obtain, consumers individually pay a price. The complete cost of delivering the public good is covered by the total tax income.


Q5) Write short notes on the following: (3x4=12)


(i) Command and Control method

Ans) 'Command-and-control' methods are typically used by governments around the world to try and limit the degree of pollution caused by human activity. For instance, the Indian government has mandated Bharat IV requirements for all engines, including those in motor vehicles, in order to reduce air pollution. Such standards are designed for various pollutants coming from mobile sources like trains, buses, trucks, and cars as well as stationary sources like power plants, smelters, factories/mills, etc. For many businesses, the same limits are specified for soil and water contaminants. Such standards are established in accordance with solid scientific and technical research with the goal of preventing the paralysis of the economy. Although different plants and vehicles may not be equally technologically advanced or have the same capacities, such criteria may be determined to be ineffective.


(ii) Wagner’s Law

Ans) An observation made in the 19th century by Adolph Wagner (1835–1917) that the share of the public sector in gross domestic product had increased over time. Wagner's law was the prediction that this trend would continue. The law is based on three claims: economic growth results in an increase in complexity requiring continued introduction of new laws and development of the legal structure; urbanization increases negative externalities, such as congestion and crime, which necessitate intervention; and the goods supplied by the public sector have a high income elasticity of demand. If the elasticity of demand exceeds one, public sector expenditure will consequently rise as a proportion of income. It is the third claim that has received most attention but empirical evidence has failed to convincingly demonstrate that the elasticity of demand is above one. Wagner's law has some compelling features but by concentrating solely on the demand for public sector services it overlooks the supply side and the politics of provision.


(iii) Ramsey Rule of optimal commodity taxation

Ans) If the consumer were given compensation in order to maintain their place on the same indifference curve, an ideal commodity tax system should result in a reduction in the quantities requested of each taxed good of roughly the same proportion. In the long run, the Ramsey rule calls for zero capital taxes and a tax on commodities to reduce deadweight loss. Aside from Ramsey analysis, equilibrium taxes and practical tax structures are crucial topics for public choice theory since the use of the tax system as a tool for income distribution can lead to rent seeking.


The inverse elasticity rule, which states that taxing goods with low demand elasticity at a higher rate will reduce efficiency loss, and the Corlett-Hauge Rule, which states that taxing leisure complement goods that will shift consumers' preferences between working and leisure on behalf of working need to be taxed at a high rate, are the foundations of optimal commodity taxation, which was proposed in 1927 by Ramsey and whose theoretical structure has developed through today's modern approaches. By altering the price before and after taxes, tax application may result in a decline in societal wealth. The decrease in production below the amount before tax as a result of the price change is what caused this. The aim of the tax systems is to minimise this efficiency loss, often known as excess tax burden or deadweight loss.

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