Friday, April 4, 2008

Incentives Matter: Bottleed Water Tax Edition

Taking a Bath on the Water Tax
from the Chicago Sun Times

Are Chicagoans trekking to the suburbs to buy cases of bottled water -- and avoid a new nickel-a-container tax that adds $1.20 to the price of a 24-pack? Or are they making the switch to tap water to save money?

One or the other is happening. Maybe both.

Revenues from Chicago's new bottled water tax are trickling in -- at a rate nearly 40 percent below projections -- exacerbating a budget crunch that has already prompted Mayor Daley to order $20 million in spending cuts.

January collections were $554,000. That's far short of the $875,000-a-month needed to meet the city's $10.5 million-a-year projection.

Wendy Abrams, a spokeswoman for the city's Budget and Management Office, said it's too early to sound the alarm.

"Since January is generally one of the coldest months of the winter, we don't think January collections are a strong indicator of potential revenue for the remainder of the year," she said.

Mark Perry's comments:

Some remedial economics for Chicago's City Council?

1. People respond to incentives.
2. Demand is elastic, and there are substitutes for everything.
3. If you tax something, you get less of it.

Or to paraphrase Thomas Sowell, this story suggests that "The first lesson of economics is that people respond to incentives. The first lesson of politics is to ignore the first lesson of economics."

Phil Miller's comments:
Remember your Micro Principles: there are three determinants of the elasticity of demand. They are 1. the availability of close substitutes, 2. the share of income spent on the good, 3. the time that people have to adjust. What's in play here is 1. There are tons of substitutes for bottled water (soda, "diet" soda (perhaps diet soda should be called "fattening" soda???), and bottled water bought in other jurisdictions) and my sense is that the demand for bottled water is price elastic, even in the short run. Methinks the activists who are so certain that bottled water is one of those evils that society must be rid of didn't think this one through.

My comments: Markets are dynamic, politicians are static. Markets work, central planning does not.

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