Ecological Economics Week 1 Tiago Domingos Assistant Professor Environment and Energy Section Department 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 –(x 1, x 2 ) — how much of each good is consumed –(p 1, p 2 ) — prices of the two goods –m — money the consumer has to spend

Budget Constraint Taxes, subsidies, and rationing –1. quantity tax — tax levied on units bought (ex. Car taxes) : p 1 + t –2. value tax— tax levied on dollars spent (IVA): p 1 +τp 1. Also known as ad valorem tax –3. subsidies — opposite of a tax a) p 1 − s b) (1 − σ)p 1 –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 – – – – – Superior a