EC 325 Public Economics MICHAELMAS TERM WEEK 11

EC 325 – Public Economics MICHAELMAS TERM - WEEK #11

Question 1

Problem

Part a)

Part b)

Part c)

Part c) • Remember, to think about substitution effect we keep the level of utility fixed. With standard preferences (I think we only need strong monotonicity) we need to decrease one of the goods whenever we increase the other good to keep utility fixed. • When price of future consumption drops, we can lower expenditure (keeping utility fixed) by consuming more tomorrow and reducing today’s consumption.

Part c) • If none of that made sense, appeal to the graphical analysis.

Part c)

Part d)

Question 2

Pigouvian tax • The charge was introduced to internalize the externalities caused by plastic bag use (environmental degradation). • Five cent charge for use or five cent reward for non-use do not change the consumers budget constraint; hence choices should not change. • So what could be happening? • Framing. • Reference dependence / loss aversion.

Pigouvian tax • Imagine you charge retailers 5 pence every time a consumer uses a plastic bag (i. e. you tax the retailer and they try to incentivize consumers by rewarding re-usable bag use). • Policy from USA suggests consumers will keep using plastic bags; loads of revenue for the government / good cause. • If externality mitigation is the goal, then might be better to use the tax (i. e. UK version of policy). • …unless you can use all the revenues to fix the environment or dispose of the plastic bags in some environmentally friendly manner.

Question 1; Part e)

Part e)