Discuss economic arguments for and against imposing substantially

Discuss economic arguments for and against imposing substantially

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Discuss economic arguments for and against imposing substantially
higher taxes on sale of alcohol.

Governments interfere in markets and their working with the primary
purpose of provision of welfare to people and preventing market
failure.

There are many methods of intervention such as

- taxes and subsidies
- buffer stocks
- applying maximum and minimum prices
- provision of public goods and services
- provision of education and training
- legislation and market reforms

Applying taxes has two purposes: to generate revenue for the
government and to discourage consumption and output of certain goods,
usually demerit goods.

Demerit goods are those goods that are usually over consumed by in a
market system, and have social costs exceeding social benefit due to
high negative externalities. They contrast merit goods which are
desirable for the welfare of society, as positive externalities exceed
negative externalities.

Taxes out on goods such as alcohol are considered indirect taxes.
Depending upon the price elasticity of a good, and its demand and
market price, government places either

- specific taxes that are of a specific number, e.g. 10 dirhams on
every bottle of beer

- ad valorem taxes that add a percentage of the market price onto
taxes e.g. 5% of price of beer

A government must analyze the effects of taxing, or increasing
taxation on a good, whether or not the taxation satisfies the goals.

The Social costs of alcohol involve the cost of production, cost of
purchase and negative externalities such as alcohol poisoning and
drunken driving deaths and violence.

The social benefits are the profit made by producers, the utility
gained by consumers and externalities such as prevention of heart
diseases.

The imposing of substantially higher taxes on the sale of alcohol may
be good in two ways:

Firstly, alcohol is regarded as a habit forming good. Hence it may be
assumed that either it disobeys the law of demand (quantity demanded
of a good is inversely proportional to change in price, all other
factors remaining constant), or it is price inelastic (a percentage
change in price causes a smaller percentage change in quantity
demanded). Although imposition of taxes will increase the market price
of alcohol, the change in demand would be substantially lower.
Therefore the government would gain revenue, which it may use for
provision of welfare.

Secondly, alcohol is a demerit good. It has private benefits as an
industry, and it provides utility and satisfaction to consumers. Its
positive externalities include reducing coronary diseases, and
providing amusement to others in social events. However, its negative
externalities include addiction, drunken driving accidents and fights
which result in property damage, and provide a burden to society. Its
positive externality of preventing coronary diseases arises only from

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minimal consumption, and can be substituted by medication and other
foodstuff. Also the opportunity cost of consuming alcohol is great, as
consumers pay money to buy alcohol, which they could have saved,
invested or used to buy some merit good. Also the production of wines
takes many years, which can be used in production of other goods.
Therefore not only will taxation of alcohol provide revenue, but also
prevent the consumption of a demerit good and hence reduce its
negative externalities.

However, within this statement lies a paradox that serves as an
argument against the consumption of alcohol. If the consumption of
alcohol reduces, then how will revenue gained form taxation rise?

Also, raising taxes will result in reduction of revenue of firms, and
hence, reduction in profits. Profit maximising firms will therefore
reduce their costs by either reducing wages, or removing labour
generating unemployment, and poor level of income and savings. Also,
alcohol is used in the production of various medicine and drugs; hence
they too will rise in prices due to rise in prices of alcohol. All
this will result in reduction of welfare, which is opposite of the aim
of the government.

Imposing taxes will also reduce the real income of people; hence
buyers and consumers for alcohol will be able to buy less. Profit
maximising firms will cut supplies further increasing prices of
alcohol. This will lead to inflation. Also, black markets may arise
too, which will serve as a hindrance on the government.

Thus the government must decide whether it aims at reducing the
consumption of alcohol, or for raising revenue. Is the aim is reducing
consumption, there other methods such as regulation of supply and
production, as well as restrictions on consumption may be more
appropriate. However, there are already many restrictions on alcohol
consumption such as legal age being 18, and permits or licences
required to consume alcohol in some countries. Further restricting
consumption may be looked upon as a loss of freedom of consumption.

I feel that instead of raising taxes on alcohol sale, it is necessary
to impose laws restricting alcohol consumption, in order to wipe out
its negative externalities. Ensuring that age limits and driving rules
are satisfied will substantially lower negative externalities.
Therefore legislative steps are necessary.
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