price of electricity to be 10 per cent higher, despite the values of elasticities. Hence, we find from
Table 6 that the changes in CPI are larger in absolute value for all the price-simulations than for the
tax-simulations. The initial impacts on electricity prices are forced to be larger, and this effect works
through the price system and influences all the price indices in the economy (see PINV, PGOV, etc.,
in Table 6).
5.2 Increase in household consumption only versus an increase in inter-
mediate use as well
The second pair of scenarios to be compared concerns the taxpayers. The results are presented
in Table 7, and the effect on CPI depends not only on the subject of the taxpayer, but also on
the assumption about consumer behaviour. If real consumption is held fixed (zeros in row one of
Table 7), then a tax on both industries and households leads to a higher increase in CPI. However,
if nominal consumption follows nominal wage income, a tax on only households leads to a higher
increase in CPI.
INSERT TABLE 7 HERE
5.3 Fixed real household consumption versus nominal consumption as a
function of nominal wages
With all pairs of simulations, the CPI is higher when real consumption is forced to stay constant.
Real consumption (CONS) always decreases if it is endogenous, no matter who pays the taxes. So,
if we force real consumption to stay constant, it is higher than otherwise, with upward pressure on
prices. With real consumption fixed; we are forcing households to keep their total spending constant
in real terms. However, this does not mean they have to consume the same amount of electricity.
Their demand for electricity decreases, but the demand for other commodities increases, since other
commodities have become relatively cheaper than electricity. This increase in demand puts upward
pressure on the CPI, between 0.204 and 0.29 per cent (columns 7 and 8 in Table 7). However, if
firms also pay the tax, their costs increase and they will increase the prices of all commodities, which
will increase the CPI variable by between 0.24 and 0.34 per cent (columns 3 and 4).
With household consumption adjustable, it is clear from the first row in Table 7 that real con-
sumption decreases with a tax on electricity. It decreases more if industries also have to pay the
tax, because then the prices of all commodities will be inclined to rise. In fact, we see that the first
two columns on the left show a slight decrease in CPI, since consumer demand has fallen enough to
contract prices in the economy. If only households pay the tax, the higher price of electricity has
a positive effect on the CPI. Only the price of electricity increases and consumers therefore only
slightly decrease their total demand.
5.4 Fixed real wages versus fixed nominal wages
With all pairs of simulations, keeping the real wage fixed leads to larger movements in the CPI
(compare n-simulations with r-simulations in Table 8).
INSERT TABLE 8 HERE
Fixed real wages imply that firms have to increase nominal wages at the same rate as the CPI,
whenever they experience a cost increase. They will react to this by laying off workers. This is clear
from the last row in Table 8 in all the columns that show increases in CPI - employment decreases
more with real wages fixed than otherwise. Production of commodities in the short-run depends on
the amounts of capital, land and labour employed, as well as technology. Only labour can change
in the short-run, so GDP will also decrease more if real wages are fixed (see the fourth row in Table
8). A decrease in supply, given a certain demand, puts upward pressure on prices. Hence, with real