Short Notes (Public Finance)

Capital gain tax: A capital gains tax is a tax on capital gains the profit realized on the sale of a non-inventory asset that
was purchased at a cost amount that lower than the amount realized on the sale.
Expenditure tax: It is a taxation plan that replaces the income tax. Instead of applying as taxed based on the income
earned, tax is allocated based on the rate of spending. This is different from the sales tax, which is applied at the time the
goods or service are provided and is considered a consumption tax.
VAT: VAT is an indirect tax which is imposed on goods and services at each stage of production, starting from raw
materials to final product.
Direct tax: Direct taxes are those taxes which are paid entirely by those persons on whom they are imposed.
Proportional tax: It is a type of tax in which whatever the size of income the rate of taxes remain constant.
Progressive tax: It is a type of tax in which the rate of taxation increases as the taxable income increase.
Regressive tax: Its burden falls more heavily on the poor than the rich since the tax rate decreases as the tax base
increases.
Digressive tax: A tax may be slowly progressive up to a certain limit, after that it may be charged at a flat rate.
Pareto optimum: A Pareto optimum is said to exist when recourses are allocated in such a way that no individual can be
made better off without making another worse off and in the production no commodity is increased without reducing the
production of another.
Social optimum: A social optimum is said to exist if the allocation of resources not only represent a Pareto optimum, but
also represent the highest level of attainable social welfare given the constraints of resources endowments technology
tastes attitudes of the society toward income, distribution and so forth.
Public goods: It is an item whose consumption is not decided by the individual consumer but by the society as a whole
and which is financed by taxation.
Pure public goods: It is an Economic concept of goods or services that provides non-excludable and non-rival benefit to
all people in the society.
Externalities: Externality is a cost or benefit from production or consumption activities that affect people who are not
part of the original activity.
Coase Theorem: The Coase theorem states that where there is a conflict of property rights, the involved parties can
bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The
theorem also asserts that in order for this to occur, bargaining must be costless in a competitive market.
Pigovian taxes: A special tax that is often levied on companies that pollute the environment or create excess social costs,
called negative externalities, through business practices. In a true market economy, a Pigovian tax is the most efficient and
effective way to correct negative externalities.
Negative externalities: A negative externality (also called "external cost" or "external diseconomy") is an action of a
product on consumers that imposes a negative side effect on a third party; it is "social cost"

Jamal Hossain Shuvo

Page 1

Short Notes (Public Finance)

Pecuniary externalities: Situation where the input prices of one producer are affected favorable or unfavorable by the
operations of the other producers.
Technological externalities: Economic situation where the production functions of one firm is favorably or unfavorably
affected by the production function of other firms.
Spillover effect: A secondary effect that follows from a primary effect, and may be far removed in time or place from the
event that caused the primary effect. Spillover effects are externalities of economic activity or processes that affect those
who are not directly involved.
Tax shifting: It is the process of transferring the direct money burden of a tax to another person is known as the shifting
of tax.
Benefit cost ratio: A ratio attempting to identify the relationship between the cost and benefits of a proposed project. A
ratio representing the benefits of a project or investment compared to its cost.
Merit goods: Goods or services (such as education and vaccination) provided free for the benefit of the entire society by a
government, because they would be under-provided if left to the market forces or private enterprise.
Marginal social cost: The total cost to society as a whole for producing one further unit, or taking one further action, in
an economy.
Subsidy: A sum of money granted by the government or a public body to assist an industry or business so that the price of
a commodity or service may remain low or competitive.
Free rider: In economics, the free rider problem refers to a situation where some individuals in a population either
consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common
resource.
Tax incidence: Tax incidence means the final money burden of a tax; who ultimately pay the tax and cannot shift to
anybody else.
Public finance: Public finance is a science that deals with the income and expenditure of public bodies and the
government of a nation.
Buoyancy of tax: A measure of how rapidly the actual revenue from a tax rises (including that due to any change in the
tax law) as the tax base rises.
Tax wedge: The tax wedge is the deviation from equilibrium price/quantity as a result of a taxation, which results in
consumers paying more, and suppliers receiving less.
Contract cost: the contract curve is the set of points representing final allocations of two goods between two people that
could occur as a result of mutually beneficial trading between those people given their initial allocations of the goods.
Expenditure incidence: Expenditure incidence is the effect of government expenditure upon the distribution of private
incomes. This is commonly contrasted with benefit incidence as an approach to planning and measuring the effect of a
government spending programme.
Jamal Hossain Shuvo

Page 2

Short Notes (Public Finance)

Arrows paradox: Arrows paradox, states that, when voters have three or more distinct alternatives (options), no rank
order voting system can convert the ranked preferences of individuals into a community-wide (complete and transitive)
ranking while also meeting a specific set of criteria. Given more than two choices, no system can have all the attributes of
an ideal voting system at once.
Social safety net: Social safety nets, or "socioeconomic safety nets", are non-contributory transfer programs seeking to
prevent the poor or those vulnerable to shocks and poverty from falling below a certain poverty level.
Excise tax: An indirect tax charged on the sale of a particular good.
Ethical income distribution: In economics, income distribution is how a nations total economy is distributed amongst
its population.
Impure public goods: There are many hybrid goods those posses some features of both public and private goods but
whose consumption by one consumer does not preclude other members of society from consuming them to some extent.
This category is called impure public goods. A perfect example is a highway system. Once built, everybody who owns a
vehicle can use it.
Excess burden of tax: The loss of economic activity due to excessive taxation. The deadweight loss is both the cost of
keeping a person on welfare and the loss incurred from the economy at large from losing that person's production.
Laissez faire: A doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the
maintenance of peace and property rights. An economic theory from the 18th century that is strongly opposed to any
government intervention in business affairs.
Unanimity rule: Unanimity Rule is a voting rule in which decisions are made based on unanimous approval of those
casting votes.
Strategic voting: Tactical voting (or strategic voting or sophisticated voting or insincere voting) occurs, in elections with
more than two candidates, when a voter supports a candidate other than his or her sincere preference in order to prevent an
undesirable outcome

Jamal Hossain Shuvo

Page 3