Ch. 10

• What is an indirect tax?

  A tax levied on expenditure on goods or services
• What is a direct tax?

  A tax charged directly to an individual based on a component of income
• What is meant by contracting out?

  A situation in which the public sector places activities in the hands of a private firm and pays for the provision
• What does the polluter pays principle advocate for?

  That a firm causing pollution should be charged the full external cost it inflicts on society
• What is competitive tendering?

  A process by which the public sector calls for private firms to bid for a contract for provision of a good or service
• What is a public–private partnership?

  An arrangement by which a government service or private business venture is funded and operated through a partnership of government and the private sector
• What is the Private Finance Initiative (PFI)?

  A funding arrangement under which the private sector designs, builds, finances and operates an asset for the public sector
• What is the purpose of a buffer stock scheme?

  To stabilize the price of a commodity by buying excess supply when high and selling when low
• What is a pollution permit system?

  A system for controlling pollution based on a market for permits that allows firms to pollute up to a limit
• What is government failure?

  A misallocation of resources arising from government intervention that causes a less efficient allocation of resources and imposes a welfare loss on society
• What are the key features of indirect and direct taxes?

  • Indirect tax: levied on expenditure on goods or services
  • Direct tax: charged directly to an individual based on income
• What are the main characteristics of public–private partnerships?

  • Funded and operated through a partnership of government and private sector
  • Involves shared risks and benefits
• What are the functions of a buffer stock scheme?

  • Stabilizes commodity prices
  • Buys excess supply when high
  • Sells when supply is low
• What are the implications of government failure?

  • Misallocation of resources
  • Less efficient allocation of resources
  • Imposes welfare loss on society