Government Activity in Economy

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Questions and Answers

What is the main reason for government intervention in the economy?

To create more jobs in the public sector

To reduce government spending

To address market failure (correct)

To increase taxes on citizens

What is the primary source of government revenue?

District councils

State-owned enterprises

Taxation (correct)

Government spending

What is an externality in the context of market failure?

A cost to a third party that is internal to a transaction

A cost to a third party that is external to a transaction (correct)

A benefit to a third party that is internal to a transaction

A benefit to a third party that is external to a transaction

What is the term used to describe the group of government agencies that carry out government activities?

Public sector Signup and view all the answers

What is market failure?

A state of disequilibrium in the market Signup and view all the answers

What are some of the reasons that can lead to market failure?

Externalities, information asymmetry, and abuse of market power Signup and view all the answers

What is the tax rate for an income between 48,000.01 and 84,000.00 in Botswana?

5% Signup and view all the answers

What is the characteristic of a proportional tax?

Its average rate remains the same as tax base increases Signup and view all the answers

Under a proportional tax, what happens to the absolute amount of tax paid as income increases?

It increases Signup and view all the answers

What is the corporate tax rate in Botswana?

22% Signup and view all the answers

What is the definition of a regressive tax?

A tax with an average rate that declines as income increases Signup and view all the answers

What happens to the distribution of income under a proportional tax?

It is unaffected Signup and view all the answers

What is the primary goal of fiscal policy during a recession?

Stimulate economic growth Signup and view all the answers

What is the equation for Aggregate Demand (AD)?

AD = C + I + G + X - M Signup and view all the answers

What is the target inflation rate set by the Bank of Botswana (BoB)?

3-6% Signup and view all the answers

What is the purpose of a contractionary fiscal policy?

To reduce inflation Signup and view all the answers

What happens to aggregate demand when there is a decrease in government spending and an increase in taxes?

It decreases Signup and view all the answers

What type of fiscal policy is used during recessionary conditions?

Expansionary fiscal policy Signup and view all the answers

Why do governments target goods with inelastic demand when imposing taxes?

Because demand is inelastic, and consumers are less responsive to price changes Signup and view all the answers

What happens to the tax burden when Ed = Es?

The consumer and producer equally share the tax burden Signup and view all the answers

What is the demand curve shape when demand is perfectly inelastic?

Vertical Signup and view all the answers

Who bears the entire tax burden when demand is perfectly inelastic?

The consumer Signup and view all the answers

What is the shape of the demand curve when demand is elastic?

Flatter Signup and view all the answers

Who bears most of the tax burden when supply is elastic?

The consumer Signup and view all the answers

What is the term used to describe government expenditures on infrastructure?

Development expenditure Signup and view all the answers

What proportion of the government budget is comprised of recurrent expenditure?

70% Signup and view all the answers

What is the primary objective of fines, such as court fines?

To reduce certain offences Signup and view all the answers

What is the definition of a tax?

A share or proportion of income of the income earners Signup and view all the answers

What is one of the objectives of taxation?

To secure revenue for the government Signup and view all the answers

How many main objectives of taxation are there?

Four Signup and view all the answers

Study Notes

Role of the Public Sector

The public sector, also referred to as the government, plays a crucial role in the economy through its activities and decisions, influencing economic activity and social welfare.
Government activities are carried out through various agencies, such as ministries, district councils, and state-owned enterprises, which are grouped into one entity: the public sector.

Market Failure

Market failure occurs when private markets do not bring about an allocation of resources that best satisfies society's wants.
Market failure can arise due to several reasons, including:
- Externalities
- Information asymmetry
- Abuse of market power

Externalities

An externality is a cost to a third party that is external to a transaction.
Example: income tax in Botswana (for citizens)
- Taxable Income (P) / Tax Payable:
  - 0 - 48,000.00: 0
  - 48,000.01 - 84,000.00: 5%
  - 84,000.01 - 120,000.00: 12.5%
  - 120,000.01 - 156,000.00: 18.75%
  - 156,000.01 and above: 25%

Taxation

A tax is a compulsory payment made to the government to provide public goods and services.
Objectives of taxation:
- Secure revenue for the government
- Allocate resources
- Distribute income and wealth
- Stabilize the economy

Types of Taxation

Proportional taxation:
- A tax is proportional if its average rate remains the same as the tax base increases.
- The tax payment grows absolutely with income, but remains the same proportionate to income.
- Example: company income tax in Botswana, with a corporate tax rate of 22%.
Regressive taxation:
- A tax is regressive if its average tax rate declines as income increases.

Fiscal Policy

Fiscal policy is the control of taxes and government spending by the government to influence economic activity.
Instruments of fiscal policy:
- Government spending
- Taxation
Purpose of fiscal policy:
- Stimulate economic growth in a period of recession
- Keep inflation low (target: 3-6%)
- Achieve full employment

Contractionary Fiscal Policy

Implemented during demand-pull inflation:
- Decrease government spending
- Raise taxes
- Combination of both
Aim: reduce aggregate demand and control inflation

Expansionary Fiscal Policy

Implemented during recessionary conditions:
- Increase government spending
- Decrease taxes
- Combination of both
Aim: stimulate economic growth

Supply and Demand Theory of Tax Incidence Shifting

To maximize revenue, tax goods whose demand is inelastic, as consumers are less responsive to price changes.
Tax incidence shifting:
- Ed > Es: producer bears most of the tax burden
- Ed < Es: consumer bears most of the tax burden
- Ed = Es: equally share the tax burden
Perfectly inelastic demand:
- Demand curve is vertical
- Consumers bear all the tax burden
Elastic demand:
- Demand curve is flatter
- Consumers bear less of the tax burden
Perfectly elastic demand:
- All the incidence of the tax falls on producers

Government Expenditure

Recurrent expenditure:
- Wages, stationery, etc.
Development expenditure:
- Infrastructure development
Composition of government expenditure in Botswana:
- 2011/12 to 2020/21: Development expenditure (50-60%) and Recurrent expenditure (40-50%)

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Description

This quiz explores the role of the public sector in the economy, including government spending and taxation, and how these activities influence economic outcomes. It covers the various government agencies involved and their impact on individuals and institutions.