Ability to pay refer to whether individuals have the effective income to be able to purchase a good.
The ability to pay is often used as the justification for a fair tax. A good tax should have various attributes one of which is equality. A fair tax should reflect the ability to pay. For example, an income tax is reflective of someone’s ability to pay because it takes a certain % of their income. The poll tax, by contrast, doesn’t take into account people’s ability to pay. The poll tax, introduced in the UK during the 1980s was charged to everyone regardless of ability to pay.
Ability to pay can also be important in determining effective demand. For example, a consumer’s demand curve may indicate at a price of £10, he is willing to buy 3 CDs. But unless he has sufficient income the demand curve remains only theoretical. Effective demand means the consumer has the ability to pay.
Ability to pay and discretionary income
Discretionary income is income – tax – essential expenses (housing, travel). Thus discretionary income will be the best guide to a person’s ability to pay.