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. When government levies a tax on seller, the tax burden on seller is always higher than the buyer.
2. A solution to adverse selection in insurance market is mandating everyone to buy liability insurance.
3.   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.
4.   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.

Answer 1

Answer) 1) Uncertain

Explanation- The tax burden distribution depends upon the elasticity of demand of the goods; when the demand is elastic then the buyers bear the tax burden but when demand is inelastic then the seller bears the tax burden.

Answer) 2) False

Explanation- The problem of adverse selection is very less likely to solve if everyone purchases liability insurance; purchasing extra liability insurance will only put financial pressure on the individual.

Answer 3) True

Explanation - In Canada there are no constitutional provisions are established which allow the federal government to intervene in provincial governments' spending policies.

Answer 4) True

Explanation - The provincial governments' keep the tax rate low during the vertical fiscal externalities in order to compensate for the loss beared by federal government.