Income Sensitivity of Price Elasticities: Effects On the Demand for Public Goods

Abstract

This article investigates the effect of income on the price elasticity of demand Abstract for public goods. While this elasticity is normally treated as identical for different income groups, the findings of this article show that such a view is incorrect, and that price elasticity is functionally related to income. To do so, a measure for the income elasticity of price elasticity is defined; empirical measures, based on a model that transforms referendum results into measures of demand, are then found for eight categories of public goods. The results show that most of these elasticities are negative, i.e., that the negative effect of tax price increases on demand for public goods becomes larger with higher income, but that, for the jurisdiction that was investigated, the opposite is the case for government expenditures on education and culture. Upper-income groups are more cost-conscious than the poor in most public goods, except for educational and cultural expenditures.