The government provides subsidies for consumers who purchase energy efficient appliances and automobiles.

a) What is the argument for providing such subsidies? What market failure(s) are these subsidies aimed at correcting?

One type of unintended consequence of this kind of subsidy policy is the rebound effect.

b) Explain what the rebound effect is; use one or more examples in your explanation. Explain why it is important to consider the rebound effect when estimating the impact of the subsidy policy on energy use.

c) How would the size of a rebound effect depend on the price elasticity of household demand for energy (for example, the demand for electricity for appliances or the demand for gasoline for autos)? Explain.