Ecological EconomicsWeek 1

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Doctoral Program and Advanced Degree in Sustainable Energy Systems

Doctoral Program in Mechanical Engineering

Overview

• Consumer theory– consumers choose the best bundles of goods

• Two parts to theory– “can afford” — budget constraint

– “best” — according to consumers’ preferences

• How much is actually consumed?

Budget Constraint

• Consumption bundle– (x1, x2) — how much of each good is consumed

– (p1, p2) — prices of the two goods

– m — money the consumer has to spend

mxpxp 2211

Budget Constraint

• Taxes, subsidies, and rationing– 1. quantity tax — tax levied on units bought (ex. Car taxes) : p1 + t

– 2. value tax— tax levied on dollars spent (IVA): p1+τp1. Also known as ad valorem tax

– 3. subsidies — opposite of a tax

a) p1 − s

b) (1 − σ)p1

– 4. lump sum tax or subsidy — amount of tax or subsidy is independent of the consumer’s choices. Also called a head tax or a poll tax

– 5. rationing — can’t consume more than a certain amount of some good

• Example — food stamps– 1. before 1979 was an ad valorem subsidy on food

– a) paid a certain amount of money to get food stamps which were worth more than they cost

– b) some rationing component — could only buy a maximum amount of food stamps

– 2. after 1979 got a straight lump-sum grant of food coupons. Not the same as a pure lump-sum grant since could only spend the coupons on food.

Budget Constraint

• IRS, source retention 2009 (not married)

Budget Constraint

• Levels of IRS (2008)

Rendimento colectável (€)

Taxas (%)

Normal (A) Média (B)

Até 4 639 10.5 10.5000

4 639 – 7 017 13 11.3472

7 017 – 17 401 23.5 18.5994

17 401 – 40 020 34 27.3037

40 020 – 58 000 36.5 30.1545

58 000 – 62 546 40 30.8701

Superior a 62 546 42 -