Why does it become necessary for the state to intervene in the economy? Mention some of the forms of state intervention.

2.    Discuss the role of state in economic activity in underdeveloped economy.

“Public Finance is no longer regarded as the matter of state policy but as its servant”. Discuss.

4.    Distinguish between Private and Public finance. Account for the growth and importance of public finance in recent times.

The basic principles of public finance are the same as those of a family budget Explain and discOss the statement.

Give the principle sources of income and the main items of expenditure of the Government of Pakistan What changes, if any, would you wish to suggest? State you reasons clearly in either case.

7.    Examine the principles which should govern public expenditure and bring out their implications.

What are the objects of public expenditure in a modern State? Account for the growth of public expenditure in Pakistan.

Explain the principle of Maximum Social Advantage and illustrate its usefulness in evolving a suitable policy of public expenditure.

State and explain the role of public expenditure in the building up of a Welfare State.

11 In what way can public finance be of help in the implementation of economic policy? Explain with examples.

12. Discuss how public expenditure influences production and distribution in various ways.

13. Sow how public expenditure can be used as a means of reducing inequalities of income and wealth.


1. Write down the four main functions of modern state.

Why increasing importance is given to public expenditure all over the world now?

How will you distinguish between progressive, proportional and regressive taxes?

How will you differentiate between direct and indirect taxes?

Name the four principles or characteristics of a good tax system. 6 How the taxes should be judged?

What is the concept of efficiency in taxation?

Which ones of the following are directed taxes? (a) Sales tax (b) gift tax (c) Income tax.

Which ones of the following are indirect taxes? (a) Income tax (b) Custom duty (c)

Wealth tax (d) Corporation tax (e) Sales tax ANSWERS:

1. The four main functions which are performed by the modern state are (a) Provision of

defence, internal security and maintenance of justice in the country (b) Expansion of development activities (c) Incurring expenditure on anti-poverty schemes and (d)

maintaining economic stability in the country.

In all the countries of the world, the role of public expenditure has considerably

increased. The reasons are that public expenditure is used as a (a) lever to raise aggregate demand for lifting the economy out of recession (b) By proper adjustment in public expenditures, aggregate demand is also managed to check inflation in the economy. (c) Public expenditure can also be used to improve income distribution (d) It also influences the composition of national product.

A progressive tax is one in which the average tax rate paid by an individual rises as income rises.

A proportional tax is one in which the average tax rate is the same at all income levels.

A regressive tax is one in which the average tax rate falls as income rises

Direct taxes are taxes which are levied directly on people. The burden of the tax cannot be shifted to others. It is paid by the person on whom it is levied.

Indirect taxes are those whose burden can be shifted on to others wholly or partially. These taxes are placed on goods and services.

Adam Smith, the father of economics, has given four principles or canons of taxation. These are (i) Canon of equality (ii) Canon of certainty (iii) Canon of convenience and (iv) Canon of economy.

The tax should be judged from the following points of view‑

(i)     Do they satisfy the principle of ability to pay (equity)

(ii)    Do they help in reducing inequalities in income and wealth.

(iii)    Do they encourage economic growth.

(iv)     Do they help in raising sufficient revenue?

Do they help in promoting economic and stability in the country.

An efficient taxation is that which causes the least amount of inefficiency for a given amount of tax revenue. The taxes should be levied in such a way that they make someone better off without moving some one else worse off.

Gift tax and income tax are direct taxes. The others in the above list are indirect taxes.

Custom duty and sales tax are indirect taxes. The others are direct taxes.

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