Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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Tuesday, September 20, 2005

What is the Price Elasticity of Demand for Plastic Grocery Bags?

In Ireland, the 5-month price elasticity of demand (arc measure) for plastic garbage bags is between -.45 and -.68
In March 2002, Ireland enacted a nationwide tax of nine pence (15 cents) on the use of plastic grocery bags, to be collected by retailers. Predictably, in just five months the tax cut plastic bag use by 90 percent.

The above quotation is from The Tax Foundation Blog's "Bootleggers, Baptists, and the Irish Plastic Bag Tax". [thanks to Kip Esquire for the pointer]. I assume the standard ceteris paribus assumption is implied.

The calculation is pretty amusing because arc elasticities are peculiar when

  1. We are not really sure what is meant by a 90% reduction in Q. If you take it at face value, then the elasticity is -.45
  2. A price of zero is involved because then all % changes in P are 2.

    % change in Qd = -(Q -.1Q)/[(Q + .1Q)/2] = -1.36
    % change in P = (P - 0)/[(P + 0)/2] = 2

    Here's a funny result: even if a 1 cent tax reduced the quantity demanded by 90%, the measured arc elasticity of demand would be exactly the same.

    Any wonder that I don't teach this material in my intro course?

    In truth, I expect the price elasticity of demand would be much higher than 0.68. See this.
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