Instructor Solution Manual For Public Finance in Canada, 6ce by digitaldownload87

Suggested Answers to Exercises

Instructor Solution Manual For Public Finance in Canada, 6ce Rosen Chapter 1-21With Appendix

Chapter 1 1. Canada’s system of government is decentralized in several ways. Most notably, especially relative to other federal countries, is the high share of subnational government expenditures as a share of total general government expenditures. In addition, responsibility over core areas of public services — including healthcare, education, social services, and so on — are the jurisdiction of provincial governments. Finally, except for only certain taxation sources (such as customs import duties), provincial governments have access to all the major sources of taxation, including income and consumption taxes. The historical reason for this decentralized system was the compromised required during early Confederation negotiations between British North American colonies. Leaving areas that were of local concern remained with provincial governments allowed diverse regions to adopt different policies. 2. a. This will increase the impact of government on the economy, as such a regulation will affect business spending decisions, labour force participation decisions, and more. It will not affect standard measures of the size of government since the expenditures will be done by private employers rather than the government. b. This will increase the impact of government on the economy, for reasons detailed in part a. But, unlike a requirement for private employers to provide daycare services, this will increase standard measures of the size of government. Such daycare subsidies will increase measured government expenditures. c. This will increase the impact of government on the economy, also for reasons detailed in part a. In addition, directly running daycare centres will also increase standard measures of the size of government since purchases of goods and services required to run these centres will count as government expenditures. d. This may or may not affect the impact of government on the economy since it is an intergovernmental grant and therefore doesn’t mechanically affect total general government revenue or expenditures. It will affect standard measures of the size of government by shrinking the federal government’s expenditures. Depending on the measure, it will also shrink provincial government revenues (though not own-source revenues, unless provinces respond by raising taxes). 3. Government provided loans do not initially affect overall expenditures, since they increase government liabilities and are therefore a balance sheet transaction. But debt service costs for government, which is borrowing on behalf of such individuals or businesses, will be an expense. In addition, such loans are not risk free, and covering losses will be a government expenditure. In addition, depending on the interest rate charged on such loans, there may be increased government debt services costs due to government borrowing may not be offset by payments by the individual or business receiving the loan. Rosen: Public Finance, 6Ce © 2023 McGraw Hill Ltd.

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Suggested Answers to Exercises 4. a. Real per capita spending has increased from less than $21,000 to over $30,000 over this period. Even excluding the COVID-related increase in spending in 2020, real per capita spending was over $25,000 in 2019. This indicates that total expenditures have increased at a faster rate than population growth plus inflation. b. The size of government has increased in terms of its real per capita size. The size of government relative to the overall economy—the fiscal burden of government, one could say — decreased from over 47 percent in 1990 to just over 40 percent in 2019. The increase to over 52 percent of GDP in 2020 is accounted for largely due to COVID-related emergency measures. Excluding that year, the share of overall economic activity accounted for by government has declined. 5. Reductions in tariffs rates will decrease customs import duty revenues of the federal government. Provincial, local, and Indigenous governments do not levy tariffs on international trade transactions, which are a strictly federal jurisdiction. But most provincial and some Indigenous governments levy taxes on consumption goods, of which imports are a part. Trade agreements may increase the total amount of taxable consumption spending and therefore may increase revenues of these governments. 6. Higher payroll taxes will likely increase government revenues and decrease provincial government deficits. Such taxes need not affect the size of provincial expenditures, however, so whether they increase the size of budgets in general depends on the measure one has in mind. These taxes affect the government’s role in the economy because they will change the cost of hiring labour or the returns to individuals for working. Whether this materially affects hours worked or employment is an empirical question. 7. Provincial governments have access to nearly all the major sources of taxation revenues. They cannot levy tariffs on imports or levy property taxes on federally owned property, but otherwise can levy taxes on income, consumption, property, and so on. Approximately half of overall provincial revenue comes from taxation sources. Local governments have very limited access to taxation and can normally only levy taxes on property within their municipal boundaries. Indigenous governments vary in terms of their access to taxation revenues. Some have access to taxation revenues including on income, on consumption through the First Nations Goods and Services Tax, or on property within reserve lands. 8. Government Expenditures before and after Intergovernmental Grants (millions of dollars) Federal Government

Provincial Governments

Local Governments

Including Excluding Including Excluding Including Excluding Grants Grants Grants Grants Grants Grants 2019 350,327 242,759 514,047 444,465 176,732 176,446 Source: Statistics Canada data table 36-10-0450-01.

Total Excluding Grants 851,470

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Suggested Answers to Exercises An increase in federal grants to provincial governments will increase federal expenditures including grants but have no effect on expenditures excluding grants. Provincial government revenues will increase, but not necessarily lead to an increase in expenditures either including grants or not. The additional federal grants in 2020 could increase provincial expenditures excluding grants if they are made conditional on provincial governments increasing their activity in certain areas, and if provincial governments do not lower their expenditures in other areas by an offsetting amount. If federal grants to provincial governments are earmarked for local governments (say, public transit support) then they will increase provincial expenditures including grants. But, in total, intergovernmental transfers will not affect total general government expenditures, unless, as mentioned, they are made conditional on increasing spending in specific areas and are not offset by reductions elsewhere.

Chapter 2 1. No. The marginal rate of substitution of beer for pizza (MRS) is 2 for Hamlet and 3 for Ophelia. This violates the necessary condition for a Pareto efficient allocation.

2. Although the economy is operating on the production possibilities frontier, the MRT will be less than the MRS because the quota causes the apples market to clear at a price exceeding the marginal cost. We can represent this situation with the following diagram.

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Suggested Answers to Exercises

c. The contract curve follows the bottom and right borders of the Edgeworth Box. At any interior point in the box, the parties will find it in their interest to trade until they reach these borders. This is because Hannah would only choose to consume tea once she has consumed all the coffee in the economy. Likewise, Jose would only choose to consume coffee once he has consumed all the tea in the economy. d. The initial allocation is not Pareto efficient. It is possible to make one better off without making the other worse off. 5. a. If John had one loaf of bread, he would be willing to give up 10 kilos of cheese for an additional loaf of bread. If Marsha had one loaf of bread, she would be willing to give up 5 kilos of cheese for an additional loaf of bread. b. The initial allocation at point a in the Edgeworth box is not Pareto efficient because John is willing to given up 2/3 of a kilo of cheese for an extra loaf of bread while Marsha would be willing to accept 1/3 of a kilo of cheese for a loaf of bread. Marsha should give John some bread in exchange for cheese.

c. Along the contract curve:

MRSbcJ 

10 5  M  MRSbcM or xbJ  2 xbM . J xb xb

Since xbJ  xbM  30, xbM  10 and xbJ  20 along the contract curve. The contract curve is a vertical line at xbJ  20.

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Suggested Answers to Exercises 6. Point a represents an equal allocation of water, but it is not efficient because there is no tangency. Point b is an efficient allocation (but not the only one).

AD:

1) the dashed line is positioned at the halfway point on the horizontal axis. 2) point b is a tangency

If Americans have a higher MRSwb than Canadians, then there are gains for residents of both countries if Canada exports water to the U.S. in exchange for bread. 7. The marginal rate of transformation between foreign and domestic movies depends on the ratio of their prices before taxes and subsidies. Because of the wedge created by the taxes and subsidies, the two price ratios are different. Therefore, the marginal rate of substitution and marginal rate of transformation are not equal, and the allocation of resources is inefficient. 8. a. Social indifference curves are straight lines with slope of –1. As far as society is concerned a ―util‖ to Augustus is equivalent to a ―util‖ to Livia.

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Suggested Answers to Exercises b. Social indifferences are straight lines with slope of –2. This reflects the fact that society values a ―util‖ to Augustus twice as much as a ―util‖ to Livia.

9. In this case, the ―Edgeworth Box‖ is actually a line because there is only one good on the island. The set of possible allocations is a straight line, 100 units long. Every allocation is Pareto efficient, because the only way to make one person better off is to make another person worse off. There is no theory in the text to help us decide whether an allocation is Rosen: Public Finance, 6Ce © 2023 McGraw Hill Ltd.

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