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CA Foundation · Business Economics · Public Finance

Which of the following government actions is the clearest example of the allocation function, as distinct from the distribution function?

Providing street lighting and public roads from tax revenue is the allocation function. Such public goods are non-excludable and would be under-supplied by private markets, so the government steers resources to them. Subsidised food and progressive taxes serve distribution, and fighting inflation serves stabilisation.

  1. AProviding subsidised foodgrains to households below the poverty line
  2. BLevying a higher income tax rate on very high incomes
  3. CProviding street lighting and public roads financed from tax revenueCorrect
  4. DIncreasing interest rates to control inflation

Explanation

The allocation function covers providing public goods and correcting market failures, because private markets under-supply goods like street lighting and roads. Subsidised foodgrains and higher taxes on the rich are distribution measures. Raising interest rates to control inflation is a stabilisation measure.

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