The Australian government recently announced its proposed Carbon Price Mechanism. The operation of this scheme is likely to raise the cost of traditional sources of energy, which is likely to adversely impact household budgets. However, the government has also proposed to compensate low-income households for higher energy costs via changes in the tax and payments systems. Your assignment task is to apply relevant concepts from consumer choice theory to the analysis of these policies. Specifically you are required to use relevant concepts and diagrams to address:

i) the effect of rising energy prices for the economic wellbeing of households;

ii) the likely effect of increases in the cost of traditional sources of energy for the energy consumption patterns of Australian households; and

iii) the effect of increased government cash payments (such as increased pension payments) on household budgets, energy consumption patterns and economic wellbeing.