In the recent budget, the government increased the carbon tax on energy products: Economics Assignment, UOL, Ireland

In the recent budget, the government increased the carbon tax on energy products. This will have the effect of increasing the price of solid fuels for home heating.

• Using diagrams illustrate and explain the income and substitution effects of this price change. assume solid fuels are a normal good, and their quantity consumed is measured on the X-axis. The quantity consumed of ‘all other goods’ is measured in the Y-axis.
• A ‘cheque in the post’ has been proposed as a solution to offset the cost of the increase in the price of solid fuels. Clearly explain, using income and substitution effects and using the diagram developed in part (a), the effect that this would have quantity consumed of solid fuels and ‘all other goods’.