economics hard MCQ

The 'Wagner's Law' of increasing state activity suggests that:

  1. As an economy industrializes and per capita income rises, the share of public expenditure in the Gross Domestic Product (GDP) tends to increase secularly
  2. Government intervention always leads to a reduction in market efficiency and deadweight loss
  3. Tax revenues will inevitably fall as tax rates are pushed beyond the optimal point
  4. Federal systems are inherently more fiscally disciplined than unitary governments

Answer: As an economy industrializes and per capita income rises, the share of public expenditure in the Gross Domestic Product (GDP) tends to increase secularly

Formulated by Adolph Wagner in the late 19th century, this law observes that economic development brings about complex social and economic relationships (like urbanization, monopolies, and externalities) that the free market cannot handle alone. Consequently, the state must expand its role to provide infrastructure, regulate markets, and offer social welfare, causing government spending to grow faster than the economy.

Topic Public Finance - Concepts
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