CA Foundation · Business Economics · Public Finance
Which of the following government measures is the best example of the allocation function in Musgrave's classification?
Imposing a pollution tax on a factory is the best example of the allocation function. It makes the polluter bear the external cost of its output, correcting a market failure and moving resource use closer to the socially desirable level. The other measures serve distribution or stabilisation.
- AGranting an unemployment allowance funded by higher income tax on the rich
- BLowering interest rates and raising spending to end a recession
- CImposing a pollution tax on a factory whose smoke harms nearby residentsCorrect
- DReducing wealth inequality through inheritance taxes
Explanation
A pollution tax makes the producer bear the external cost, correcting a market failure in resource allocation. The unemployment allowance and inheritance tax serve distribution, while lowering rates and raising spending to end a recession serves stabilisation.
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