Price vs Income

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One of the most persistent myths in Australian politics has been that providing
household assistance undermines the effect of imposing a carbon price. If the
prices of carbon-intensive products rise by$10 and you give me $10 in
assistance, aren’t we back where we started?

If there were only one product in the world, the answer would be yes. If
there’s only one thing I can buy, you can be sure that’s where every dollar in
my wallet is going to go. Soif you put the price of that product up and
increase my income, I’ll carry on exactly as before.

Yet the one-product world is a far cry from the vast plethora of options facing
modern consumers, who can spend on anything from a ballet lesson to a
bunch of bananas, a train fare to a television. And here’s the insight from
modern economics: when you have choices, changing relative prices changes behaviour.

......

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In understanding how carbon pricing works, there’s no more critical
distinction than the difference between prices and incomes.

- Andrew Leigh in the article "The price is right for consumer shift"

Comments

Jaded Jeremy said…
William,
Historical data in US shows that it does work as intended.
July 15, 2011 at 11:47 PM
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