EAE 313: PUBLIC FINANCE

Q. 3. & 4.

(c) The inverse demand facing a farm sector sis denoted by P=20-X where X is output and P is output price. The sector's activities also generate positive eternality and the marginal externality benefits is MEB = 10 - 0.5X. The marginal cost of production is MC = 2 + X. Required (i) How much output will be produced and at what consumer price if the industry operates as a monopoly in the output market? (4 marks) 11 What will be the welfare loss in this case? (8 marks) (iii) What policies can be used to attain the social optimum? (2 marks) (a) A monopolist demand function is given by; P=Q- -10Q + 28 and cost function; C=Q2. If the firm is causing a pollution to the society valued at MC = 3, solve for the social optimal level of output and price. What should be the tax level? (10 marks) ( b ) The free-market system may bring about considerable income inequalities which, if widely perceived as 'unfair' outcomes, may require intervention to correct. Give five reasons for this. (10 marks)DC 3. (a) The government is interested in taxing sugar in order to increase its tax revenue. The market is currently at equilibrium at a price of Kishs. 10 per kg and sales of 1000 kgs per month. Suppose that own price elasticity of demand at the equilibrium point is 0.1 and the own price elasticity of supply at this point is 0.2. The government announces that the tax measure with the new market price to be maintained at Kishs. 15 per kg. Required: (a) Compute and show the suppliers and buyers tax burden (5 marks) (b) How much will the government get form the new tax measure? (3 marks) (c) Calculate the deadweight loss of the tax (excess burden of the tax) (4 marks) ( b ) Comment on the motivations for privatization in Kenya and compare them with those of developed economy. (8 marks) 4. (a) The community's demand for a park is given by: Q=2,200 - 20 P The cost function of developing a park is 2.5Q2 . Required (1) Calculate the equilibrium prices and quantities when the park is a private good and when it is a public good. (8 marks) (ii) Discuss the difference in (i) above. (4 marks)