Question

STATE whether the statement is True or False or Uncertain. EXPLAIN in detail.

1. According to wealth substitution effect, private saving increases due to social security taxes.
2. Government’s health care program can solve both moral hazard and adverse selection problems.
3. The only reason why countries have social security is to improve the economic status of the aged.
4. As education is a private good, government should not provide it.
5. Individuals always prefer cash-transfers to in-kind transfers.

Answer 1

(a) True, social security taxes increase the private savings Social security taxes means saving for the future time.

(b) False, Moral hazard and adverse selection are both terms used in economics for threat management and insurance to describe circumstances where one party is at a disadvantage to another.

(c) True, social security provides a base of income on which workers can construct to plan for their retirement.

(d) False, education is a public good in economics and thus should be provided by government also.