The economic problem with a ‘tax on everything’ is that it leaves few options outside of the ‘everything’ for consumers to make changes in their behaviour
The federal carbon tax, implemented on Monday, has been defended as the option most favoured by economists to reduce carbon emissions.
That seems to be the logic of the federal government, as it advertises its carbon tax as a “price on pollution.” It’s an odd appellation for carbon dioxide, which thee and me breathe out constantly without considering it a pollutant, halitosis notwithstanding. But the effect is not always the same, as the elasticity of demand varies from good to good, depending on whether it is easy to make substitutions, or reduce the amount consumed.
That’s what the government does on alcohol or tobacco, with a tax on everything in that category, so substitutions are not really possible. It is possible to drink or smoke less, but given the habit-forming — even addictive — qualities of those goods, it may be that the tax does not diminish consumption, but just fills government coffers. Or it could accomplish both, lower consumption and higher revenues.
Current gas taxes are far greater than the 4.4¢/litre carbon tax that went into effect this week. So have those taxes decreased the amount of gas consumption over the last decades? If not to a significant degree — at least not sufficiently in the eyes of the federal government — then it is because gasoline is a relatively inelastic good. The price can go up, but consumers will still buy roughly the same quantity, as it is difficult to make substitutions.
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