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CA Foundation · Business Economics · Public Finance

Consider these government actions: (P) imposing a tax on tobacco to reduce its consumption, (Q) providing subsidised foodgrains to low-income households through the public distribution system, (R) increasing public capital expenditure during a recession to raise employment. Which option correctly matches P, Q and R to Musgrave's allocation, distribution and stabilisation functions respectively?

The correct matching is P-Allocation, Q-Distribution, R-Stabilisation. The tobacco tax corrects an externality and influences resource use. Subsidised foodgrains redistribute real income towards the poor. Higher public spending in a recession supports demand and employment, which is the stabilisation role.

  1. AP-Allocation, Q-Distribution, R-StabilisationCorrect
  2. BP-Distribution, Q-Allocation, R-Stabilisation
  3. CP-Stabilisation, Q-Distribution, R-Allocation
  4. DP-Allocation, Q-Stabilisation, R-Distribution

Explanation

Taxing tobacco corrects a negative externality and shifts resource use, so it is allocation. Subsidised foodgrains for low-income families redistribute real income, so it is distribution. Raising capital spending in a recession to lift employment and demand is stabilisation. Only the first option gives this matching.

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