TOFROM
Introduction
Alcohol consumption unlike other good has rose arguments pertaining to its effect on the society due to excess consumption that is declared national menace since it negatively impacts the society. Several measures have been taken to reduce on its consumption and subsequent effect in the society. One of the measures proposed is increase on tax on alcohol so as to reduce on its aggregate consumption. This is an economic policy aiming to affect the individual supply and demand of alcohol and aggregate resulting consumption. Tax would increase on the burden on consumers as well as producers and its relevant distribution of tax incidence. This would make alcohol expensive and therefore cuts down on its consumption.
Craig A. Gallet. The demand for alcohol: a meta-analysis of elasticities. The Australian Journal of Agricultural and Resource Economics, 51, pp. 121–135.
Alcohol is a luxury good; hence, its consumption is totally based on the leisure activities of persons. This implies that if factors favoring leisure such as high income, social class and derived taste are increased, then likely people will take more of alcohol. However, in a situation where these factors are held constant and in addition to tax charge on alcohol, then people will automatically reduce on their alcohol drinking behavior. This is a rational choice to a consumer since they will have to weigh between retaining alcohols that its price is increased due to tax charged and taking less of normal food such as rice and bread to substitute alcohol. This is so since every person’s income faces some level of constraint and restricting income makes the person restrict himself to a specific budget line that cannot go beyond his earning.
Taking more alcohol will imply reducing on the consumption of other basic goods like food and paying rent. Economics therefore argues that a rational being will have to reduce on his or her consumption of alcohol; a luxury good, at a point where its price is increased so as to be able to meet his daily budget of necessities. This give a huge response to price increase to good such as alcohol called perfect elasticity.
Gyimah-Brempong, Kwabena. Alcohol availability abd crime: Evidence from census tract data. Southern Economic Journal. 2001, 68(1), 2-21.
Tax increase in alcohol would hence automatically reduce quantity people drink since none will be willing to forgo eating and paying rent at the expense of taking alcohol. Increase in alcohol drinking with increase in tax would give a negative social benefit as shown in the diagrams.
Price of
Alcohol in $
Marginal social cost
Price + tax A
Initial Price B Increased social cost C Marginal private cost
DB DA
Q1 Q2 Q3 Q4 Quantity Consumed
The graph above describes the behavior of the society in reaction to increase in alcohol tax. The initial consumption at Q2 gave a social cost C in both public and private sectors. When tax is added, social cost such as price, additional, accidents and other moral rote increase to A. This cost is therefore too high and the society decides to give up alcohol drinking up to quantity Q3 and Q1 depending on the leisure factors available to them.
The table above shows the current data on the alcohol market regarding average prices and current tax. In case a ten percent tax increase is applied, the amount in tax and the average prices would also change; a feat that would have an impact on the demand in the market.
Pros of the policy recommendation
- Increase in tax would not have adverse effect on the alcohol production industry as it would when the government strictly cuts on alcohol production.
- Tax increase give the alcohol market a fair ground of reorganizing itself and finding equilibrium stability without human interference as economics requires of a competitive market to settle by its own natural forces.
- Increase in tax would increase in government revenue through tax collection.
- Increase alcohol price through tax charged would reduce on morality rate societal rote because of bad drinking habits.
- Tax increase will also restrict importing of alcoholic goods into the country.
Cons of the policy recommendation
Raising taxes on alcohol has its demerits as discussed below.
- Much of the tax burden will be shifted to the consumer, burdening the consumer at the expense of the producer.
- It can lead to massive loss of jobs as companies institute measures to cut costs.
- Increasing taxes on alcohol might have a negative effect on the economy because most of the revenue generated by the business is not reinvested in other enterprises. As such, governments miss other avenues of revenue.
- Increasing taxes also increases government control on the industry. This effectively reduces the liberty business have to pursue innovation.
Works cited
Craig A. Gallet. The demand for alcohol: a meta-analysis of elasticity. The Australian Journal of Agricultural and Resource Economics, 51, pp. 121–135.
Gyimah-Brempong, Kwabena. Alcohol availability abd crime: Evidence from census tract data. Southern Economic Journal. 2001, 68(1), 2-21.
Appendix
Calculation
Question
The demand and supply functions of alcohol are given by Qd=100- 20P and Qs=40-25P. if the U.S. government increase a unit tax of $0.5, determine and interpret the tax reaction behavior by its consumers.
Qd=100 – 20P (i)
Qs=40 – 25P (ii)
First, determine the rise in supply curve
Q – 40 = 25P
1/25 Q – 40/25 = P
0.04Q – 1.6 = P
P + t = 0.04Q - 1.6 + 0.5 where t is tax increase, P + t is new supply equation also given as Pt
Pt = 0.04Q – 1.1
0.04Q= Pt + 1.1
Q= Pt /0.04 + 1.1/0.04
Q= 25Pt + 27.5 .. (iii) this gives the new supply curve
At equilibrium; Qd=Qs
Therefore for the new price of alcohol, we equate demand equation, (i) with new supply equation (iii)
100 – 20P = 25P – 27.5
45P = 127.5
P = 127.7/45
P = 2.8
Old price of alcohol; we equate old supply curve (ii) to old demand price (i)
100 – 20P = 40 – 25P
45P = 60
P = $1.33
Tax burden on consumers
$2.88 - $1.33 = $1.55
This shows that for an individual to drink a bottle of beer, he will pay $1.55 more than the old price before tax of $1.33. Unfortunately, the increase in price of alcohol is more than even the initial price before tax, therefore rational consumers will opt not to drink alcohol or substantively reduce their consumption.
Supplier’s burden
S.B = tax – consumer tax burden
S.B = $0.5 – $1.55= $-1.05
The negative burden shows that the supplier has shifted all the tax to the consumer thereby making alcohol more expensive.
This above behavior can be shown on the graph as below.
Price S1
So
Tax increase
P1
Po
P2
D
0 Q1 Q2 Quantity of alcohol consumed Q
