DATE: MONDAY 30TH NOVEMBER 2009 TIME: 9.00 A.M. – 12.00 NOON
?? Answer question ONE and any other two questions.
?? Time allowed three (3) hours
Question One
a) Define and illustrate graphically the excess burden of taxation indicating precisely
how it can be measured. (10 marks)
b) State and derive Samuelson’s rule for the provision of the public good. (8 marks)
c) One of the methods that has been suggested for pricing public enterprise is the
marginal cost pricing rule. Explain this rule while stating its limitation. (6 marks)
d) On the basis of the limitations specified in (c) above, what are the possible alternative
pricing rules. (6 marks)

Question Two
a) Using a diagram, explain how an externality may contribute towards inefficiency in
an economy.
b) Various solutions have been suggested for solving negative externalities. Discuss at
least six of the solutions. (9 marks)
c) Briefly explain the weaknesses of Coase theorem. (5 marks)
d) In developing economy such as Kenya, explain the causes of government failure.
(6 marks)
Question Three
a) By defining Pareto efficiency, explain the three marginal conditions for optimal
resource allocation in an economy. (8 marks)
b) Giving relevant illustration in the Kenyan economy, discuss briefly four theories of
public expenditure growth. (8 marks)
Question Four
a) Giving relevant illustration(s), explain why centralization may be preferred to
centralization in a federal economy. (8 marks)
b) Explain the various principles governing tax assignment in a federal state.
(6 marks)
c) Public sector economists have argued that a closed ended matching grant is better
than open ended grant. Discuss this statement using a well labeled diagram.
(6 marks)