CA Foundation · Business Economics · Public Finance
A government introduces the following measures in one budget: (i) a tax on cigarettes, whose consumption imposes health costs on others; (ii) a cash transfer scheme for landless labourers financed by a surcharge on high incomes; (iii) a cut in the fiscal deficit through lower spending to control inflation. Which option correctly matches these with Musgrave's functions in order (i), (ii), (iii)?
The correct matching is allocation, distribution, stabilisation. The cigarette tax corrects an externality and so adjusts resource allocation. The cash transfer funded by a high-income surcharge redistributes income. Reducing the deficit to control inflation is a stabilisation measure aimed at price stability.
- AAllocation, Distribution, StabilisationCorrect
- BDistribution, Allocation, Stabilisation
- CStabilisation, Distribution, Allocation
- DAllocation, Stabilisation, Distribution
Explanation
(i) A tax correcting a negative externality adjusts resource use, so it is allocation. (ii) Transfers funded by a surcharge on the rich redistribute income, so it is distribution. (iii) Cutting the deficit to restrain inflation is stabilisation. Only the first option matches all three in order.
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