Economics Question?

Question

Beginning in 1994, environmental regulations have required that gasoline contain a new additive to reduce air pollution. This requirement raised the cost of gasoline. The Bureau of Labor Statistics deide that this increase in cost represented an improvement in quality.

a. Given this decision, did the increased cost of gasoline raise the CPI?

b. What is the argument in favor of the BLS's decision? What is the argument for a different decision?

Any help would be appreciated. Thank you.

Answer 1

I assume that the improvement in quality means an improvement in the quality of the air.

a. To the extent that energy in general and transportation in particular is a significant part of the costs of production of many goods and services, then an increase in the cost of gasoline would have significantly affected production costs in the economy and no doubt these costs would have been passed on to the consumer by way of higher prices and would have raised the Consumer Price Index (CPI).

b. It seems to me that the argument that supports BLS' decision is that the cleaner air resulted in a reduction in social costs and increased efficiency. This means, for example, that fewer people would have suffered respiratory diseases because of the cleaner air and therefore fewer resources would have to be directed towards healthcare.

An alternative argument in support of a different decision is that the increase in the CPI, which means an increase in the cost of living, effectively reduces the income of consumers and makes them poorer and worse off since they are unable to purchase the same basket of goods that they could have purchased before the increase in prices.

Answer 2

The cpi is calculated on the price of a basket of goods . If the quality of a good has increased then the increase in price is not considered as inflation, so the decision means that the increase in price did not raise the cpi.