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EC3200 
 
UNIVERSITY OF WARWICK 
 
Summer Examinations 2015/2016 
 
Economics of Public Policy 
 
 
Time Allowed: 1.5 hours 
 
Answer TWO questions. All questions carry equal marks. Answer each question in a separate 
answer booklet. 
 
Read carefully the instructions on the answer book provided and make sure that the particulars 
required are entered on each answer book. If you answer more questions than are required and 
do not indicate which answers should be ignored, we will mark the requisite number of answers 
in the order in which they appear in the answer book(s): answers beyond that number will not 
be considered.  
 
 
1.  
Take an economy with two consumers, denoted A and B, one private good, x, and one 
public good, G. Let each consumer have an income equal to M. The prices of both 
private and public good are 1. Consumers’ utility functions are: 
 
                                   UA=log xA +log G, UB=log xB +log G. 
 
(a)   Assume that the public good is privately provided so G=gA +gB, where gA and gB are 
A and B’s voluntary contributions towards the provision of G. Eliminating xA from 
A’s budget constraint calculate dgB/dgA and find the locus of points along which the 
indifference curves of A is horizontal, use this to sketch the indifference curve of A. 
(10 marks)   
 
(b)  Calculate A’s choice of gA to maximise utility, given all the possible choices of B in 
term of gB. Repeat the same exercise for B and calculate the level of private provision 
of the public good. (20 marks) 
 
(c)  Calculate the optimal level of G that maximises the utilitarian social welfare 
function, and has the cost equally allocated. Contrast this with the private provision 
level. (20 marks) 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 

(continued) 
 

EC3200 
 
 
2.  Consider a consumer endowed with l unit of labour who consumes two commodities, 
denoted 1 and 2. In the absence of taxation the consumer has the budget constraint 
p1x1+p2x2=wl, where w is the wage rate, p1 and p2 are commodities’ pre-tax-prices, and 
x1 and x2 represent commodities’ consumption.  
 
(a)  Show that an ad valorem tax levied at a rate on both commodities and on labour 
raises no revenue. Explain the fact. (30 marks) 
 

(b)  Show the equivalence between a uniform commodity tax at rate t on the two 
commodities and an income tax at rate t/(1+t) on wages. (20 marks) 
 
 
3.  (a)  Explain what is meant by the destination and origin principles of commodity  
          taxation. Give examples of situations where each of the two applies. What are the    
          efficiency properties of these two principles? (20 marks) 
 
    (b)  Explain why tax competition between different countries can only occur under the   
           origin principle. What determines the equilibrium levels of tax? Is there any     
evidence that commodity taxation occurs in practice? (30 marks) 
 
 
 
4.  (a)  What is the difference between source and residence-based taxes on capital income?   
           What is capital import neutrality and capital export neutrality?   (20 marks) 
 
(b)   Give a brief exposition of the Zodrow-Mieskowski model of capital tax competition.   
       In what way (if any) is the equilibrium level of taxation and public good provision  
       inefficient?  (30 marks) 
 
 
 

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