Question

Part I. True/False/Uncertain/Explanation.

Make sure you provide an explanation why you think the statement is True or False or Uncertain. You get ZERO mark if you do not provide any explanation.

1. As federal and provincial governments have exclusive taxation and spending power in Canada, there is no way for federal government to intervene in provincial governments spending policies.
2.   In the presence of vertical fiscal externalities, provinces will take the loss in federal government revenue into account and may therefore set tax rates too low.

Part II- Long Answers

1.When a smoker successfully manages to obtain insurance coverage as a non-smoker, what kind of market failure happens? Explain.

Answer 1

Part 1

Q) The given statement is true. Both federal government and provincial government have their ambit of public spending. Provincial government can take decision of spending based on the condition of that particular province and federal government can't intervene.

Q) The given statement is false. Vertical fiscal integrity can prove to be a success model for a particular province. Vertical fiscal province Accompany growth and welfare.

Part 2

Q) This kind of market failure comes under moral hazard. The insurance company were not aware of smoker. Now after taking insurance, smoker will smoke more or take more risks because he know that the insurance company will pay the associated cost of health problems. Thus insurance company often do not give insurance to even healthy person because they are unable to screen out between the two. As a result market fails for insurance company.