Isra-Mart srl: The price is right

www.isra-mart.com

One of the most persistent myths in Australian politics has been that providing household assistance undermines the effect of imposing a carbon price. If the prices of carbon-intensive products rise by $10 and you give me $10 in assistance, aren't we back where we started?

If there was only one product in the world, the answer would be yes. If there's only one thing I can buy, you can be sure that's where every dollar in my wallet is going to go. So if you put the price of that product up and increase my income, I'll carry on exactly as before.

Yet the one-product world is a far cry from the vast plethora of options facing modern consumers, who can spend on anything from a ballet lesson to a bunch of bananas, a train fare to a television. And here's the insight from modern economics: when you have choices, changing relative prices changes behaviour.