Question 2: 10 marks

As per the Stage 3 tax cuts, the Government will increase the top threshold of the 32.5 per cent tax bracket from $120,000 to $200,000, removing the 37 per cent tax bracket completely from 1 July 2024. The plan means that around 94 per cent of all taxpayers are projected to face a marginal tax rate of 32.5 per cent or less in 2024-25. This is equivalent to decreasing the marginal tax rates for the 'top-incomes' or the 'rich'. Is this a Pareto improvement move? Explain the economic rationale with the help of a well-labelled diagram.

(5 marks for diagram and 5 marks for explanation)

Question 3: 10 marks

A natural monopoly represents instances of market failure, but this may alone does not justify the outright public ownership. Instead, the public sector can regulate natural monopolies to meet its desired objectives.

a)Explain with the help of a well-labelled diagram how the public sector can regulate a natural monopoly in line with the first-fundamental theorem of welfare economics (i.e., achieving the first-best market outcome). Discuss the efficiency consequences. (5 marks)

b) What would the second-best regulation of the natural monopoly by the public sector involve? You can use the same diagram as in part (a) above to answer this question. In your explanation, also mention why a second -best regulation is still socially desirable than no regulation or any removal of regulation (i.e. deregulation). (5 marks)