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Essay example - Assessment item
Macro & Microeconomics
Pages 8 (2008 words)
Price elasticity of demand (PED) is the extent to which quantity demanded changes to a change in price (Bamord, Brunskill, Cain, Grant, Munday, Walton 2002). When PED of a good is between 0 and 1 then it is said to have inelastic demand with the good being more inelastic the…
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The reason for PED being elastic in the long run is that consumers may switch to alternate fuel sources such as gasoline or they may use alternate methods to travel other than private transport such as travelling in public buses. Consumers also take time to adjust to price changes (Grant 2000). In the short run if the price of petrol increases consumers will still demand petrol because it takes time to adjust their demand for petrol to a change in its price.
1c. As the PED of petrol is inelastic a rise in price will cause total expenditure on petrol to rise too. When demand is inelastic, price and total expenditure (also total revenue) move in the same direction (Sloman 2007). For example let us assume that the price of petrol rises in the long run from $4 to $5. At $4 total expenditure on petrol was $400 with consumption being 100 liters of petrol at PED of 0.2. Given the PED formula:
At PED of 0.2, given a price of $5 quantity demanded for petrol will fall by 5 liters to 95 liters. The total expenditure after the price increase would be $5*95= $475 (more than $400). Hence this shows that as price is increased total expenditure will also increase if demand is inelastic.
2. Carbon tax is a form of pollution tax. It is levied on the amount of carbon content emitted by fossil fuels. Carbon taxes are used to combat the effects of a negative externality, in the form of pollution, caused by emission of carbon content when fossil fuels are burnt (Dowdey 2007). When imposing a carbon tax, the government decides on a fixed price on one ton of carbon released, a tax is then imposed on the fossil fuels such as coal, petrol, natural gas as well as electricity.
Carbon tax has many advantages. The purpose of a carbon tax is to reduce the effect of greenhouse gases by controlling carbon emissions from fossil fuels. The effect of a carbon tax is shown in the ...
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