UPSC CSE Prelims
Economic Systems Previous Year Questions (PYQs)

Detailed Explanation:

Answer: Option 2 — Only two

Physical capital is classified into fixed capital (durable assets used repeatedly over time) and working capital (consumable items used up in production). Among the given pairs, only the computer (fixed capital) and petrol (working capital) are correctly categorized.

❌ Pair 1 – Incorrect: A farmer's plough is a durable tool used repeatedly over multiple production cycles, making it fixed capital, not working capital.

✅ Pair 2 – Correct: A computer is a long-term asset used over an extended period, correctly classified as fixed capital.

❌ Pair 3 – Incorrect: Yarn used by a weaver is consumed in the production process and needs regular replacement, making it working capital, not fixed capital.

✅ Pair 4 – Correct: Petrol is consumed during production and requires regular replenishment, correctly classified as working capital.

📝 Short Notes: Physical Capital Classification

Detailed Explanation:

Answer: Option 4 — the opportunity cost is transferred from the consumers of the product to the tax-paying public.

When the government provides a commodity free of cost, the opportunity cost does not disappear—it is merely transferred from the direct consumers to the tax-paying public. The resources used to provide the free commodity are financed through taxation, meaning taxpayers bear the burden of foregone alternative uses of those resources. Thus, while consumers do not pay directly, society as a whole incurs the opportunity cost through taxation.

📝 Short Notes: Opportunity Cost

• Definition: Opportunity cost is the value of the next best alternative foregone when making a choice. It represents what is given up when resources are allocated to one use instead of another.
• Universal Principle: Opportunity cost exists in all economic decisions, whether made by individuals, firms, or governments, because resources are scarce and have alternative uses.
• Free Goods vs. Economic Goods: True free goods (like air) have no opportunity cost as they are abundant. However, goods provided "free" by the government are economic goods with real resource costs.
• Government Provision: When governments provide goods or services for free, they use tax revenues or borrowed funds. The opportunity cost is thus transferred to taxpayers who could have used those resources elsewhere.
• Example: If the government provides free electricity to farmers, the cost is borne by all taxpayers through subsidies, representing the opportunity cost of alternative public spending (like healthcare or education).
• Policy Implication: Understanding opportunity cost is crucial for evaluating the true cost of public policies and ensuring efficient resource allocation in the economy.