Because People on The Internet Are Wrong

(source for the post title is here)

In view of recent events, I think it might be wise to have a little refresher on the basics of microeconomics - don't worry, I am going to keep it simple:

Microeconomics is the study of two things: supply and demand. To keep it simple, I'm only going to talk about demand in this post. With the odd exception, Microeconomics says two things about demand:
1) If the price of something goes up, demand goes down. i.e. People buy less of something when it is more expensive.
2) If the price of something goes down, demand goes up. i.e. People buy more of something when it is less expensive.

Retail stores take advantage of this microeconomic theory when they do things like 'holding sales' in which they lower prices in the expectation that demand will rise.

The classic microeconomic demand curve thus looks something like this*:




You can see that as price goes up (as you move to the right on the chart) demand goes down (the line slopes downward). On the flip side, as price goes down (you move to the left on the chart), demand goes up (the line slopes up to the left).

To make it more concrete, imagine that the line represents sales of big screen TV's. You can imagine, that if the price of a 42 inch LCD TV dropped from $3,000 to $2,000, people would buy more.

Let's make it even more concrete by considering one single person, let's call him Bob, who has the following willingness to buy a 42 in ch LCD TV at various prices.

Price > $1,000 - Bob won't buy
Price between $500 and $1,000, Bob will buy 1 TV
Price less than $500, Bob will buy 2 TV's.

So the demand chart for Bob looks like the following:



You can't see the line past $1,000 because it's at 0 (since Bob buys 0 TV's at that price.

Now, let's imagine a scenario where the government decided the key to the provinces future is that people buy more TV's. Perhaps they've seen the studies that show that people who watch TV spend more and save less and they figure this will boost retail sales, but the motive doesn't really matter. So we'll say that the current price of a 42 inch TV in this example is $2,000 and the government introduces a $200 subsidy so that the price for the consumer drops to $1,800.

Bob might have one of two possible reactions to this news:

1) Well, $1,800 is still too expensive for me so it won't change my behaviour, but I bet that in a province with millions of people, there are some out there who are willing to buy at $1,800 but not at $2,000.

OR

2) Well, $1,800 is still too expensive for me so it won't change my behaviour. So I'd bet this subsidy is too small to have any impact on TV sales.

If Bob's reaction #1 is correct, then the demand curve would like the following:



In this world, any change in price, even a very small one, leads some people to change their behaviour, because there are so many people that there are bound to be some where that price change was their personal tipping point.

If Bob's reaction #2 is correct, then the demand curve would look like the following.



Nobody in the province will buy a TV until the price drops from $1001 to $1000, and then everybody in the province buys a TV all at once.

In my opinion, and in the opinion of every microeconomist in the world, scenario #1 is the correct one.

Which brings us to the carbon tax introduced in the B.C. budget. Here, instead of reducing the price of TV's in order to increase demand, the government is increasing the price of carbon emissions in order to reduce demand.

Again there are 2 possible reactions:

1) This small increase is likely to change the behavior of those people who were near the tipping point for changing their behavior already.

OR

2) Nobody will change unless the price of carbon is increased by some greater amount, at which point everybody will all of a sudden change. The situation is exactly analogous to the TV example. Except, that where nobody (I hope!) would argue for scenario 2) in the TV case, I have seen any number of otherwise sensible people arguing for #2 in the carbon case.

Some examples:

Stehpen Rees (who I'll give credit to for at least admitting that it is a start): "Most commentators agree that in order to influence consumer behaviour a carbon tax has to be around $30 per tonne."

Sacha (who does include the weasel-word materially, on which he might mount a weak defense): "I do not believe that 7.23 cents per litre of gasoline will materially change people’s behaviours toward consuming gasoline (presumably through driving)."


Raphael Alexander: "Shorter answer: carbon taxes of this size are too insignificant to reduce anything but the cash flow of the poorest working Canadians, while creating no incentive to reduce emissions"

(credit to MarkCH in the comments on Alexander's post, for laying out the marginal argument, even if nobody actually engaged his comments).

Robert (responding to Mark): "These taxes will have a marginal effect on consumption among marginal consumers.

If by marginal you mean none, then I agree."

And of course, you can always rely on the National Post to be the most clueless of all, with a headline that reads: "B.C.'s carbon tax won't change consumer habits"

Maybe people are just trying to say that the increase is so small that the impact really will be immaterial, or maybe people are disappointed because they thought that the first implementation of a carbon tax would be so huge that it would immediately force everyone to make drastic changes to their lifestyle (or vote out the government which implemented the tax, get the tax removed and carry on), but it comes across to me as thinking that there is some magic threshold which has to be crossed before anything changes, and that is simply not the case.

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One other comment I have, which Rees makes as well, is that people really don't seem to get the idea of a revenue neutral tax. I've heard many many folks talking about the increased costs from the carbon tax and how they will be passed on to the consumer, but almost nobody who mentions the flip side which is that with other taxes dropping to offset the carbon tax, those businesses with a small carbon footprint (the ones we want to encourage to grow) will have lower costs, which they too will presumably pass along to customers.

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Back to my main point, this is certainly not the first time I've encountered this widespread inability to grasp the concept of marginal changes in behaviour, it seems to arise regularly on both the left and right wings whenever someone wishes to claim that a government policy will not have any impact. I've never really known what to make of this blind spot, but I was reading Steven Pinker's excellent book, 'The Stuff of Thought' last year, and he made a point which I think might at least provide a partial explanation:

"Humans have a primitive concept of number, which distinguishes only one, two and many, though they can estimate larger quantities approximately. They use this coarse way of quantifying not just when tallying objects (as in 'singular', 'dual' and 'plural') but also when locating things in space (as in 'at', 'near' and 'far') and when locating things in time (as in 'the present', 'the recent past', and 'the remote past')." (from p. 429)

Perhaps it is this instinct to classify things in a discrete fashion ("at" or "near" )rather than a continuous fashion ("1 metre away", "10 metres away") which leads people to reason that a policy or tax is either "enough" or "not enough" to change behaviour, as opposed to the change in behaviour scaling with the magnitude of the size of the carbon tax. Who really knows, but it's a possibility.

Anyway, yeah, this post is a little obnoxious, but we're pretty much doomed, and we're extra doomed if politicians get nothing but grief when they come out and do the right thing. And sure, a carbon tax which totals $30/tonne won't be enough on its own to cause the necessary reductions in greenhouse gas emissions, but nobody, including the government, is claiming that it is. It's a start, it's a precedent, it's a part of a larger framework of initiatives, and it's something people should support if they're serious about fighting climate change.


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* Actually, in microeconomics they usually put price on the y axis and quantity sold on the x axis, but I'm used to seeing the independent variable (price, in this case) on the x axis and the dependent variable on the y axis so I flipped the axes.