Microeconomics: Budget Operation and Marginal Analysis

Study Notes

Marginal social benefit (MSB) is measured on the positive part of the Y-axis, and marginal social sacrifice (MSS) is measured on the negative part.
The curve EE represents the MSB of successive units of money spent as public expenditure, allocated optimally between different public uses, and it falls from left to right because MSB declines as public expenditure increases.
The curve TT represents the MSS, and it slopes downwards from left to right, showing rising MSS as additional units of taxation are raised from the people.
The curve NN measures marginal net benefits (MNB), which is derived from successive additions to the public budget, calculated by deducting MSS from MSB.
The optimum size of the budget is determined at the point where MNB is zero, where MSB is equal to MSS, and the MNB curve NN cuts the X-axis.
At any point to the left of the optimum size, MSB will be greater than MSS, and MNB will be positive, making it beneficial to increase the size of the budget.
Market failure occurs when resources are misallocated or allocated inefficiently, resulting in the market failing to produce and allocate scarce resources in the most efficient way.
Market failure can be caused by inefficient producers, externalities, environmental concerns, and lack of public goods.
An externality is an effect on a third party caused by the production or consumption of a good or service.
Michael Todaro defines market failure as a phenomenon that results from the existence of market imperfections that weaken the functioning of a free market economy.
Public goods are a special type of good that can be consumed by everyone, regardless of whether they have paid for the good, and their availability can lead to market failure.
The government can play an important role in correcting market failures and improving economic efficiency.
A good tax system should facilitate stability and growth objectives, run in harmony with national objectives, and meet the requirements of equity in the distribution of tax burden, efficiency in tax use, and ease of administration.
Direct taxes are paid by a person on whom it is legally imposed, and the burden cannot be shifted to any other person, including income tax, wealth tax, property tax, and estate duties.
Indirect taxes are paid by customers, but their burden may be shifted to consumers of goods and services, and they are convenient because they are paid in small amounts and at intervals.
Indirect taxes have in-built safeguards against tax evasion, have a wide coverage, and some are elastic in nature, allowing the government to increase its revenues when necessary.

Description

Test your understanding of budget operation and marginal analysis in microeconomics. This quiz covers the concepts of marginal social benefit (MSB) and marginal social sacrifice (MSS), and how they relate to public expenditure and taxation.