(Related to the Apply the Concept on page 163 ) An economics student made the following comment about a proposed carbon tax: I read that a tax on carbon would have a greater negative effect on low-income consumers than high-income consumers, but I disagree. Business executives spend a lot of money and time traveling- both by car and plane. Many rich people have homes that are considerably larger than the average family's home. Heating and air conditioning bills are certainly greater for larger homes than smaller homes. The cost of a carbon tax would surely be greater for those with the highest incomes. Explain whether you agree that a carbon tax would impose a greater burden on high-income consumers than low-income consumers.

Step by step solution

01

Understanding the statement

Firstly, read and understand the statement provided by the economics student who is arguing that a carbon tax would impose a greater burden on high-income earners due to higher consumption rates.

02

Define carbon tax and its impact

A carbon tax is a fee that a government imposes on any company that burns fossil fuels. The more carbon compounds a firm emits, the higher the fee. This tax is designed to reduce carbon dioxide (CO2) emissions, known to be the leading cause of global warming. Carbon tax directly affects the cost of energy, thus it has impacts on both consumers and businesses.

03

Analyzing the impact on low-income consumers

Now, consider the impact on low-income earners. They spend a higher percentage of their income on energy-intensive goods and services, compared to high-income earners. Thus, an increase in energy costs or any products/services associated with high energy consumption due to a carbon tax would proportionately affect their budget more, even if their total energy consumption is less than the consumption of high income consumers. Therefore, this is where the regressive nature of carbon tax comes into play.

04

Considering the impact on high-income consumers

High-income consumers, even though they might consume more energy, do not spend the same proportion of their income on energy needs. Therefore, while their absolute spending on energy might be larger, it is a smaller portion of their overall income. Consequently, a carbon tax could still impose a smaller burden on their overall expenses compared to low-income individuals.

05

Formulating the answer

After understanding and analyzing the impacts of a carbon tax on both low-income and high-income earners, one may conclude if they agree or disagree with the economics' student statement. For this particular exercise, it's clear that while high income consumers may pay more in absolute terms due to a carbon tax, the burden on low-income consumers is higher in relative terms. However, these impacts can be mitigated if the revenue from the carbon tax is returned to society in a way that benefits the low-income households.

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