For an inferior staple that dominates a poor household's budget, a price rise can increase the quantity bought, because the income effect swamps the substitution effect.
Named by Marshall for Giffen in 1895. Clean cases are rare and contested; the best evidence comes from Jensen and Miller's work on rice in Hunan and noodles in Gansu.
In practice
- A subsidised staple's price rises and poor households buy more of it, because the meat they could previously afford is now out of reach.
- A commuter facing higher fares gives up the occasional taxi and takes more buses, so the fare rise raises bus journeys.
- Possible explanations
- The explanation is that for a staple dominating a poor household's budget, a price rise makes the household so much poorer that it substitutes away from costlier foods and buys more of the staple, with the income effect outweighing substitution.
- In its favour
- Jensen and Miller's work on rice in Hunan and noodles in Gansu provides the cleanest evidence, produced by a field experiment designed to test it.
- Against it
- Clean cases are rare and contested, the conditions required are narrow, and the historical examples usually cited, including Irish potatoes, do not survive scrutiny.
- Standing
- Clean real-world cases are rare and contested; the best evidence comes from rice and noodle staples in Hunan and Gansu.
- Subject
- Economics & Incentives
- Essay
- Rules for choosing, and the paradoxes that humbled the theory