The Market for Alcoholiic Beverages Essay

The Market for Alcoholiic Beverages Essay

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ECON 1101 - The Market for Alcoholic Beverages

An important purpose of this study has been to search for differences in economic factors, prices and incomes to explain the differences in the consumption of alcoholic beverages. The effects of the prices and incomes on consumption are measured by elasticity’s, which include price elasticity.

Price elasticity of demand is a measure used in economics to show the elasticity of the quantity demanded of a good compared to a change in its price, ceteris paribus. Overall, alcohol is measured to have relatively inelastic demand of around 0.5 (-0.5), according to various studies. This means that even though a price increase will decrease overall sales, it will increase the total revenue gained from the market. However, when government-set taxes are the means of increasing the price of a unit of alcohol, both consumers and producers suffer a burden, as shown in the diagram below.

Assuming the demand remains unaffected in the diagram above, it can be seen that the supply curve shifts to the left from ‘S’ to ‘S + Tax’. Because alcohol is an inelastic good, the demand curve would be fairly vertical. The price rises from p1 to p2, and this creates a new equilibrium at p2, q2. As this happens, there is a consumer burden in p1 and p2; and a producer burden in p1 and p3. The consumer burden is much larger that the producer burden because the consumers have to buy the good (which may even be due to addiction) and so they will pay whatever the price is, while the producers don’t have to worry about losing too many consumers. The consumer and producer burden added together is equal to government revenue, and the rest shown is the ‘deadweight loss to society’.

In Australia, excise, customs...

... middle of paper ...

...oor the producer surplus is equal B + F + G, while the consumer surplus is just area A.
Contrast this to the tax. Whilst the price still increases, it is the government that gains revenue from the tax, equal to B + F, whilst the consumer surplus is still area A, the producer surplus is now just area G, and B + F goes to the government as tax revenue. From an economic view, both change behaviour, and assuming that there are negative externalities associated with excessive alcohol use, neither incurs a deadweight loss. Thus, total surplus is the same under both scenarios (A + B + D + F).
Overall, policy makers have opted for a price floor over tax. While both aren’t truly economically effect, a price floor is more suitable to address the real social costs associated with binge drinking.

made by Gallet (2007) and Wagenaar, Salois and Komro (2009).

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