ECS 1601 ASSIGNMENT 2 SEMESTER 1 2023

Three broad functions of government:  the allocative function, which refers to the role of government in correcting market failure and achieving amore efficient allocation of resources  the distributive function, which refers to the steps taken by government to achieve a more equitable or sociallyacceptable distribution of income than that generated by market forces  the stabilisation function, which refers to the measures taken by government to promote macroeconomic stability (eg full employment, price stability and balance of payments stability) 3. 2 Reference: Prescribed book PG 286 How government intervenes  public provision of goods and services  through its role as a market participant.  government spending is a powerful tool  taxation  regulation. 4. 3 Reference: Prescribed book PG 288 Nationalisation means that the government takes over the ownership or management of private enterprise (with or without compensation). In other words nationalisation is the transfer of ownership from private enterprise to government. 5. 4 Reference: Prescribed book PG 372 An expansionary fiscal policy is applied when the government (in the person of the Minister of Finance) increases government spending (G) and/or reduces taxes (T). This is illustrated by a rightward (upward) shift of the AD curve. Fiscal policy is contractionary when government spending is reduced and/or taxes are increased, illustrated by a leftward (downward) shift of the AD curve. 6. 1 Reference: Prescribed book PG 292 Government spending has to be financed in one way or another. There are basically three ways of financing government spending: income from property, taxes and borrowing. 7. 3 Fiscal policy aimed to redistribute income. 8. 3 Reference: Prescribed book PG 294 Vertical equity requires that people in different positions should be taxed differently. Rich people should therefore pay more tax than poor people. 9. 4 Reference: Prescribed book PG 294 DIRECT AND INDIRECT TAXES Taxes are classified into two major categories: direct and indirect taxes. Direct taxes (also called taxes on income and wealth) are levied on persons, more specifically the income or wealth of individuals and organisations such as companies. They include personal income tax, company tax and estate duty. Indirect taxes (also called taxes on goods and services or taxes on products and production) are levied on transactions (eg the purchase of goods and services) and are usually paid by those who consume the goods and services in question. Examples include VAT, customs duties and excise duties. GENERAL TAXES AND SELECTIVE TAXES VAT is a general tax since it is levied on most goods and services. Excise duties are selective taxes which are levied on specific goods only. In South Africa, excise duty is levied on tobacc o and alcohol (these duties are commonly referred to as “sin taxes”), fuel and a few luxury goods. PROGRESSIVE, PROPORTIONAL AND REGRESSIVE TAXES The distinction between progressive, proportional and regressive taxes is based on the ratio of tax paid to taxable income (ie the average tax rate). 10. 4 Country 4 produces more apples 11. 2 To produce beef country 1 forgoes 1 600/64 = 25 apples To produce beef country 2 forgoes 9 000/300 = 30 apples