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CA Foundation · Business Economics · Public Finance

Which of the following government actions is the clearest example of the allocation function rather than the distribution or stabilisation function?

Providing street lighting and sanitation from general taxes is the allocation function. Such public goods are non-excludable and would be under-supplied by private markets, so the government steps in to allocate resources to them. The other options aim at redistribution or macroeconomic stabilisation.

  1. AProviding street lighting and public sanitation financed from general taxes because private markets would under-supply themCorrect
  2. BImposing a higher income tax rate on top earners and giving cash transfers to poor households
  3. CRaising interest-linked borrowing to offset a fall in private investment during a recession
  4. DIncreasing subsidised foodgrain supply to families below the poverty line

Explanation

The allocation function corrects market failure by providing public goods and adjusting resource use. Street lighting and sanitation are non-excludable and would be under-supplied privately. The tax-and-transfer and food subsidy options are distributional, and the recession borrowing option is stabilisation.

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