By Stephen Koukoulas
There is no doubt that in economics, price signals work. When the price of something increases, demand falls. The evidence is in on the markets for electricity and tobacco where government-imposed price hikes have seen consumption fall sharply. There are clear implications from these economic laws with the government’s proposed Medicare co-payment and higher university fees that will mean less use of health services and fewer people going to university as those price hikes impact on demand.
The price on carbon, the colloquially named “carbon tax”, saw electricity prices rise 10% when it was implemented in July 2012. One of the many objectives of the price on carbon was to give a financial incentive for consumers to curb their consumption of electricity. This was seen to be through a combination of switching to more energy-efficient appliances, self-generation (solar panels on the roof), and better insulation so that the length of time heaters and airconditioners were on was reduced.
Use less electricity and the price rise will not hurt the household budget all that much. It was as simple as that.
The carbon price was in place for two years; the repeal was passed by parliament in July. In those two years, the volume of energy consumed by the household sector fell sharply.
The Australian Bureau of Statistics says that in the June quarter 2014, the final quarter in which the carbon price was still in place, the volume of energy consumed by the household sector was 4.6% below the level of the March quarter 2012, the quarter before the carbon price took effect. On a per capita basis, the decline in those two years was more than 8%, a quite massive decline as consumers reacted to the shock of rapid price rises. In the June quarter 2014, household consumption of energy was the lowest since the September quarter 2007, over which time the population had increased by about 12.5%.
It must be noted that the carbon price was only a small part of the sharp rise in electricity costs over the past five years. There was a range of other factors specific to the generation and distribution of electricity which forced prices higher. That said, the sharp price rises, whatever the cause, only reinforced the downward pressure on electricity demand.
There are also some other factors that were likely to have dampened electricity demand. The global climate change debate no doubt has seen some consumers change their behaviour and consumption patterns for altruistic reasons and not just for financial concerns – people doing their bit to cut carbon emissions by using less electricity.
It was a similar issue with household consumption of tobacco, where the impact of excise increases has seen demand for tobacco in the first half of 2014 fall to the lowest level ever recorded. Price signals are working as consumers turn away from smoking and spend their income on other things.
Government policy helped drive the consumption of tobacco down 3.5% since the end of 2012, down 28% since 2000 and a quite remarkable 55% since 1980.
As for electricity, other factors are no doubt driving that fall. The plain-packaging laws are discouraging young people from taking up smoking, and the deaths of 15,000 people a year from tobacco-related illness is also a factor behind the fall in demand as tobacco companies somewhat ironically lose their valuable customers as a direct result of the goods they are selling to them.
The end point of the examples of the carbon price and tobacco excise is that price signals and well-crafted government policies work to bring about behavioural change.
This means that the proposed Medicare co-payment will, without question, cut demand for GP services as people stay away from the doctor because of the higher cost. The government has noted that this is a main motivation for the co-payment.
So, too, with higher university fees that result from university deregulation. Higher fees will inevitably lower demand for a university education, which has what should be obvious implications for the skills levels of the population in a decade or so.
The politics over the price signals relating to the carbon price and tobacco excise yielded what most thinking people would conclude are desirable results. The economy, societal wellbeing and even government finances benefited from these changes.
The doctor co-payment and higher university fees will no doubt help with the budget bottom line, at least in the short term, but the higher cost of these services will probably result in people being a little bit sicker, less skilled and a little more ignorant.
