15 December, 2008

Ezra Klein Watch: Income and Substitution Effects


Luckily, the CBO examined exactly this and found that “if the government chose to sell the allowances and used the revenues to pay an equal lump-sum rebate to each household in the United States…the size of the rebate would be larger than the average increase in low-income households’ spending on energy-intensive goods.” That said, I imagine it will still be a bit hard to explain that the government is going to make the price of energy much higher, but will give people checks for yet more money than that, in the hopes that the high price tag triggers an irrational response to use less energy even though the lump sum check could actually cover the average family’s fossil fuel habit.
Let's say you buy 10 gallons of gas per week at $2 per gallon ($20 total). Then the price of gas goes up $4 per gallon, but you get a check in the mail for $20 every week (unrelated to the amount of gas you actually purchase.) Would you
(a) Keep buying 10 gallons a week for $40.
(b) Buy 5 gallons a week for $20 and pocket the additional $20.
(c) Something in between.
I'm guessing that no one, except for people who absolutely need to drive a fixed amount every week, would choose (a).

1 comment:

Cassady said...

Boy, this really beg an interesting psychological question!

I think it would be great to see more study in economics having to do with using market incentives to provoke various psychological reactions and thus reach desired effects.

It may be a tad coercive, but I'm all for it!