A regional government is choosing between a new flood barrier and a reduction in business taxes. Both policies use the same limited public spending budget. ...
Question 1 Report
A regional government is choosing between a new flood barrier and a reduction in business taxes. Both policies use the same limited public spending budget.
(a) What is meant by opportunity cost in this decision? [1]
(b) Which government objective could a flood barrier support besides economic growth? [1]
(c) Explain why the tax reduction may increase investment by firms. [1]
Answer Details
(a) Opportunity cost is the next best alternative forgone. [1] If the government chooses the flood barrier, the opportunity cost is the tax reduction, or the benefits that reduction would have provided.
(b) A flood barrier can support environmental protection, or sustainable development, as well as economic growth. [1]
(c) Lower business taxes increase retained profit or the expected return from investment, making investment more attractive to firms. [1]
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