Carbon Tax and the Households Consumption Bundle - Assignment Example

Economics assignment (i) If only the carbon tax was imposed but no dividend provided, how might the household’s consumption bundle change relative to its initial (pre-tax) choice? You need to consider the 2 alternative scenarios: Scenario 1: Both x and z are normal Scenario 2: x is a Giffen good while z is normal Scenario 1 Normal goods The imposition of the tax would have many effects to the consumption patterns of the people. The first is that it would result to a reduction in the use of carbon emitting materials. This is because the imposition of the tax would mean that there would be an increase for money that is required to use the products such as gas and coal. Increase in the prices of commodities results to a subsequent decrease in the demand and hence the consumption patterns of the people. The main reason behind this logic is that the issuing of dividends would return and act as a payment for the people for the tax that is levied on the use of the carbon emitting commodities. It would also result to a maintenance in the general level of livelihood. This means that with the issuing of dividends, the families and the livelihoods would be able to maintain their standards of living. This is as compared to when they are levied the tax with no dividend accompanying it. This would result to an increase in the general expenditure of the company. Scenario 2 Giffen goods A giffen good can be defined as a good that violates the law of demand. The law of demand states that as the price of a given commodity, good or service increases, the demand for the commodity decreases. This hence means that at higher prices, few commodities are bought as compared to at lower prices. Giffen goods are hence items that violate this rule. They have a higher demand with increases in the price. The demand also falls with decrease in the price. The case would be very different in the case x was a giffen good. These goods have their demand increase with increases in the price. They also have their demands falling as the price decreases. In this case, an increase in the tax would be replicated to an increase in the price of the commodities. This would hence mean that it qualifies for the concept of the giffen goods. They are the goods, which have their demand increase with increases in the price. The demand for x would increase while that for z would reduce due to the price increase. By commodity z being a normal good as in this case, the patterns that it would exhibit would be totally different from those that are exhibited by the commodity x. by being a normal good, it follows the law of demand. This is where the increase in the price of the commodity would result to a subsequent decrease in the demand for the commodity. The increase in this case is that which is caused by the increase in the level of taxes and the absence of the dividends. This is as illustrated in the table below. Normal goods price Giffen goods Price po p0 Quantity Quantity Q0 q0 (ii) How might the proposed carbon tax and dividend scheme change the household’s consumption bundle and its wellbeing relative to the pre-tax situation? In the pretax situation, there is the absence of the tax and the dividends to the people. This makes them pay less amounts of money for the use of the carbon emitting components such as gas and other fossil fuels. Through this, they are able to maintain their normal patterns of demand and they are able to maintain their expenditure at constant levels. Through this, their income level is not in any way affected by the carbon emitting materials in a manner that is not regular or fair to them. The economy of the country is bound to increase because the levels of savings of the people will increase. This will on its part result to economic stability both for the people and for the country. The consumption of the products in the case of normal goods is bound to decrease. This is due to the law of demand where the price increase of a commodity is translated to a decrease in the demand for the same commodity. There will hence be a decreased demand for the products. This is bound to affect the production levels of the commodity. This is attributable to the lack of adequate demand for the products that are not fuel-efficient. The imposition of the tax to the people has on its part many effects. The first effect is that it would result to an increase in the price of the commodities. This would hence mean that the people would pay more to acquire the same quantity or even lesser quantity of goods and commodities as compared to before the imposition of the tax. This will hence result to a reduction in their income levels. A reduction in their levels of income will mean on its part that they will have to increase their expenditure levels in order to cater for the increased costs of the commodities. This hence results to even lower levels of savings by the people. There is however a reprieve for the people with the introduction of the dividends which are paid to them. This is because they will result to the standardization of the levels of expenditure of the people. They will hence result to the balancing and the elimination of the deficit that was instigated by the introduction of the tax to the commodities. This will hence result to the standardization of the expenditures that are incurred by the people. The income levels will as such increase. They will also be entitled to earning the benefits that arise from their taxation expenditure. Dividends act as a repayment to the people for the tax levy that is charged on them by the government. Through the dividends, the standards of living of the people will be maintained to the same levels as existed before the taxes were imposed on the people. The table indicating the scenario is as shown below. Effect on demand Price with dividends P2 P0 P1 With no dividends Quantity Q0 q1 (iii) Using your analysis from parts (i) and (ii), briefly compare the effects of a standalone carbon tax versus a carbon tax plus dividend scheme on emission and wellbeing of households. The existence of standalone carbon tax has the effect of reducing the levels of incomes of the people who are subjected to it. This is usually through the increase in the expenditure that is incurred by the people. This is through the general increment in the price of the commodities that are supplied. Increase in the levels of expenditure results to a lower saving capability for the people. This has the effect of that it alters the levels and the standards of living of the people who are affected. The long-term effect of this is that it will result to a reduction in the quantity demanded by the people of the commodities. This in turn increases the shift in the demand of the people from the carbon emitting commodities, which include coal and other fossil fuels to the use of other renewable and carbon free components. The people who operate in the affected areas are prone to make losses in their business ventures. On the other hand, those people who operate in the trade with the renewable sources of energy and those that are free from carbon will make much return and hence more profits for their people. The case of the use of dividends for the people is different as compared to the earlier stated case. On its part, it results to the stabilization of the expenditure that is incurred by the people. This is through the people earning dividends from the taxes that are imposed on them. This improves the welfare of the people. The income levels are held constant. This is the same case with the levels and the standards of living of the people. The people in this case are able to make savings from their incomes. This is despite the expenditures that they incur from their operations. The people who operate in the companies and industries that deal with the production of the carbon emitting materials will have their jobs secured and their welfares put to check. The use of dividends can hence be said to be of benefit to the residents of the country. This is because it acts as a refund for the taxes that are imposed. The people are able to live their normal lives without much struggles. Thnis hence has an effect of increasing the livelihoods of the people. The standards and levels of living are maintained and in some cases improved. The absence of the dividends on its side has some effects to the livelihoods of the people. The first effect is that it will result to the loss of jobs for the people who work in industries that deal with the production of carbon emitting components. This also has the effect of disorienting the income levels of the people. They will as a result have difficulties in the adjustingthemselves to the new expenditures that they incur in their operations. This hjence results to the decrease in the standards of living of the people. The economy of the country as a result is also prone to have a stunted growth as a result of this. References SKOUSEN, M., & TAYLOR, K. C. (1997). Puzzles and paradoxes in economics. Cheltenham, UK, E. Elgar Pub. JENSEN, R. T., & MILLER, N. (2007). Giffen behavior theory and evidence . Cambridge, MA, National Bureau of Economic Research. http:// papers.nber.org/papers/w13243 HEIJMAN, W. (2012). New insights into the theory of Giffen goods . Heidelberg [u.a.], BARZEL, Y., & SUEN, W. (1990). The demand for Giffen goods is downward sloping . 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