Unit 6 - Taxes & Subsidies Flashcards
Preferences*
Economists tend to identify preferences through observation - what choices someone actually makes
When someone makes a choice, it is contextual, meaning that people can only choose between the options available to them and those options have many factors involved. Each choice is seen as a bundle of all the impact on a decision maker
Incentive*
An influence that can change your choice on a package (ice cream or pickles +$20), but that can’t change your preference
Environmental Taxes and Subsidies*
Environmental tax shifting is any approach that increases taxes on actions that are environmentally harmful
Environmental subsidy shifting increases subsidies on actions that are environmentally beneficial or decreases subsidies on actions that are environmentally harmful
How are taxes/subsidies decided on? Full Cost Accounting:
Getting the price right by identifying EXACT costs of negative and positive externalities and correct for them as Pigou suggested, and then using taxes and subsidies to ‘internalize’ those externalities
This is an effort to return decision making to market forces and allow individuals to make free choices about production and consumption, but WITH the externalities added on to the original price
How are taxes/subsidies decided on? Goal Oriented Approach*
No effort to get the price right, so no valuations needed
Desired outcomes are determined by policy makers (usually informed by environmental scientists, economists, etc)
Taxes and subsidies are enacted to whatever level is needed to achieve the desired outcome
Example of Goal Oriented Approach to taxes/subsidies
BC wants to reduce its GHG emissions by 33% by 2020. This value was arrived at through consultations with environmental scientists and other groups before being voted on by the Provincial Government
At the Margins*
Economists don’t presume that everyone responds exactly the same to price changes, instead they consider changes at the margins (near decision thresholds)
Many decisions have smaller and more thresholds (with heating costs going up someone may choose to turn down the heat and wear a sweater)
There are always people who are on the fence of making a decision, and small changes (such as carbon taxes/subsidies) can push them over the line
How does elasticity affect a decision on a subsidy/tax
The elasticity of a good/service determines how effective a tax can be in changing behavior
Over the Long Term, goods/services are more elastic. True or False?
True
