Question

The U.S. government is considering reducing the amount of carbon dioxide that firms are allowed to produce by issuing a limited number of tradable allowances for carbon dioxide (CO2) emissions. In a recent report, the U.S. Congressional Budget Office (CBO) argues that “most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline . . . poorer households would bear a larger burden relative to their income than wealthier households would.” What assumption about one of the elasticities you learned about in this chapter has to be true for poorer households to be disproportionately affected?

a. The cross-price elasticity of demand between electricity and gasoline is positive.

b.The price elasticity of supply for energy products is less than one.

c.The income elasticity of demand for energy products is between zero and one.

d.The price elasticity of demand for energy products is greater than one.

Answer 1

The correct option here is Option (c) that is, the income elasticity of demand for energy products is between zero and one, i.e., the consumers in market have inelastic income demand for energy products.

Because, the question doesn't asked about elasticity between electricity and gasoline. So, we can rule out the first option.

Also, we're not talking about the supply side of the energy products. therefore, we can rule out the B) option too.

And we can also rule out the option D) because if price elasticity of demand for energy products is greater than one, it means that consumer can substitute these goods with some other goods and no burden will be faced by poor people.

Therefore, the correct option is c). Because when income elasticity is between zero and one,that is, when inelastic income demand exist, it'll be the poorer section only that will have to bear a larger burden because with their very low income they have to spend a large proportion of their income on electricity and gasoline.