There is a hot debate in the literature about the consequences of different ways of

financing the government expenditure. Let suppose you are an Economic Advisor of

Prime Minister of Pakistan. Keeping in view the debate in the literature, what factors

would you suggest to the Prime Minister to consider/keep in mind to finance a given

government expenditure. Explain. (7)

B. Baluchistan is the most underprivileged province of Pakistan. The Federal Government

wants to improve the welfare of the residents of the province by providing better health

services. Which of the following grants should the government use to achieve the

objective and why?

i. Lump sum/unconditional grant

ii. Matching grants

Graphically explain your point of view. (8)

C. Consider a mineral that is in fixed supply, Q

S = 4. The demand for the mineral is given

by Q

D = 10 - 2P, where P is the price per Kg and Q

D

is the quantity demanded. The

government imposes a tax of $2 per Kg. on the mineral.

i. What is the price paid by the consumer before the tax is imposed, and in the post-

tax equilibrium?

ii. What is the price received by producers before and after tax?

iii. How much revenue is raised?

iv. Is there any dead weight loss of this tax? If yes, what is it?