Fuel for Thought

When teaching elasticities, fuel always seems to have been a favourite example of a good with very inelastic demand in response to price changes. However, this AA research adds further to the evidence that suggests that even fuel has now reached it’s limit in terms of quantity demanded remaining firm at it’s market price.

The report suggests that consumers have cut fuel usage by 15% over the past three years as prices at the pumps have soared. I certainly know that I’ve stopped to consider the need for journeys, and where as I used to fill up a tank there have been occasions where I’ve simply part-filled it.

This article provides a neat lead in to a number of ‘Markets in Action’ topics. It would be useful in looking at how the elasticity of demand varies at different points along the demand curve. Of course it’s not just the price, but also the fall in income that many folk have suffered. So just how much is PED and how much of this is YED?

If there has been any positive from this it’s been the fall in CO2 emissions, which is a nice example of positive/negative externalities.

And of course, given that the AA claim that all of this has wiped £1bn off the government’s tax take in the form of petrol duty, many will argue that the government should cut duty so that prices at the pumps fall, total tax revenue increases and consumers feel better off and able to spend elsewhere. So, just how effective is the current government policy? Should we be focused purely on tax revenues and consumer spending? Or is the fact that emissions are starting to fall and journeys reduce a good thing?