Question

How do social costs of using fossil based fuels and the prospects of global warming affect the elasticity of gas demand?

Should we tax fossil fuels to entice consumers to switch to alternative fuels?

Answer 1

Elasticity of a good tells us the percentage change in demand due to percentage change in prices. Inelastic demand says that, huge change in prices cause a little change in quantity consumed while elastic demand says that a little change in prices causes a huge change in quantity demanded. We have now elastic demand of fossil fuels because there is huge demand of fossil fuels these days. A little change in prices causes demand to rise by huge. If this usage of fossil fuel continues to rise in future, the elasticity of demand of fuels would become inelastic as we would be left with limited resources which will only cause prices to rise and quantity consumed to same, which in the future will leads to people shifting to other fuels.

I live in India where government charge tax on fuels, even this is the major source of tax revenue government collects. Tax on fossil fuels should be upto a limit so that even a middle class or lower class people can afford it. It should not be taxed at such a high level that it is only affordable to rich class. The tax should be socially optimum such that it gives revenue to the government and that revenue can be spend on development or extraction of alternative fuels. Taxing fossil fuels and providing subsidies to alternative fuels will reduce the consumption of fossil fuel and shift people to alternative uses.