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Pigou’s Law and the proportionality of income and price elasticities of demand

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  • Snow, Arthur
  • Warren, Ronald S.

Abstract

Pigou’s Law states that, for preferences characterized by additively separable utility and constant marginal utility of income, and goods with a negligible budget share, there is a proportional relationship between the income and uncompensated own-price elasticities of demand, the factor of proportionality being the income elasticity of the marginal utility of income. We derive a general version of Pigou’s Law that relaxes these assumptions. We then show that several published variants of Pigou’s Law are special cases of the general version for the additional restrictions on preferences and budget shares they impose.

Suggested Citation

  • Snow, Arthur & Warren, Ronald S., 2015. "Pigou’s Law and the proportionality of income and price elasticities of demand," Economics Letters, Elsevier, vol. 132(C), pages 136-138.
    • Handle: RePEc:eee:ecolet:v:132:y:2015:i:c:p:136-138
    DOI: 10.1016/j.econlet.2015.05.002
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    References listed on IDEAS

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    Cited by:

    1. Y-H Henry Chen, 2017. "The Calibration and Performance of a Non-homothetic CDE Demand System for CGE Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 2(1), pages 166-214, June.
    2. Diego Comin & Danial Lashkari & Martí Mestieri, 2021. "Structural Change With Long‐Run Income and Price Effects," Econometrica, Econometric Society, vol. 89(1), pages 311-374, January.
    3. Macedoni, Luca, 2022. "Large multiproduct exporters across rich and poor countries: Theory and evidence," Journal of Development Economics, Elsevier, vol. 156(C).
    4. Ghoddusi, Hamed & Rodivilov, Alexander & Roy, Mandira, 2021. "Income elasticity of demand versus consumption: Implications for energy policy analysis," Energy Economics, Elsevier, vol. 95(C).
    5. Kenneth W Clements, 2023. "Tastes," Economics Discussion / Working Papers 23-01, The University of Western Australia, Department of Economics.
    6. Andreas Chai, 2018. "Household consumption patterns and the sectoral composition of growing economies: A review of the interlinkages," Discussion Papers in Economics economics:201802, Griffith University, Department of Accounting, Finance and Economics.

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    More about this item

    Keywords

    Pigou’s Law; Elasticities of demand; Consumer demand;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior

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