I know @Kevinmilligan will cringe, but I will tweet an example of a Carbon Tax with lump-sum "Rebate" at an Intermediate Microeconomics level (1/4)
(Note: this is mainly just me prepping an example for a future in which I teach Intermediate Micro) #teachecon
(Note: this is mainly just me prepping an example for a future in which I teach Intermediate Micro) #teachecon
Suppose we have a consumer that only consumes 2 goods (or two groups of goods):
1. a carbon intensive good, y
2. a carbon neutral good, x
And the consumer has an income of I
(2/4)
1. a carbon intensive good, y
2. a carbon neutral good, x
And the consumer has an income of I
(2/4)
If we impose a carbon tax of t, it raises the price of y, but not x.
Consumer reduces consumption of y. They also reduce x, but not as much: 1) The tax decreases their purchasing power, they thus buy less of both goods. 2) They also substitute x for y
Consumer reduces consumption of y. They also reduce x, but not as much: 1) The tax decreases their purchasing power, they thus buy less of both goods. 2) They also substitute x for y
Now if we impose a tax AND a "rebate". The rebate can offset the decreased purchasing power (or “income effect”) of the tax, but the incentive (the new higher relative price of good y) to substitute remains. The consumer will decrease consumption of y & increase consumption of x
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