Answer to Question #60510 in Finance for Doltsee

Question

Differentiate between the following:
1) Positive externalities and negative externalities
2) Optimal efficient tax structure and optimal tax system.
3)Current transfer and capital transfer.

Answer 1

1) An externality is defined as a benefit or cost that is imposed on a third party, such as society, other than the producer or consumer of a good or service. Positive externalities refer to the benefits and negative externalities refer to the costs associated with the production or consumption of a good or service.
2) The optimal tax structure of an economy depends on its tax base, tax rate, and how the tax rate varies.
Optimal tax system is the study of designing and implementing a tax that reduces inefficiency and distortion in the market under given economic constraints.
3) Current transfer is added to the current income of the recipient. But capital transfer contributes to the capital formation of a country.