4.1.8 The market mechanism, market failure and government intervention in markets
Alcohol is a demerit good, a good that has a greater private benefit than social benefit which leads to a loss of welfare in society. Indirect taxes come in two types: ad valorem, which is a price imposed for each transaction(such as VAT) and specific taxes that aim to make consumption less viable.
Through the use of Figure 1, I have shown the effect of imposing a specific tax (tax per unit) onto alcohol the tax has caused the price of alcohol to move from P1 to P star and hence reduce the quantity demanded of alcohol. This increase in price will affect consumers and producers. There will be a reduction in the number of consumers that possess effective demand for alcohol which may cause them to stop drinking alcohol or move to the substitutes. This depends on how inelastic consumer demand is as if demand is highly inelastic consumers may still pay the higher price for their example exacerbating the problem of market failure.
Producers on the other hand may be disadvantaged to produce alcohol as increasing the amount of specific taxes may cause a loss in total revenue in addition new firms trying to enter the market may see the taxes as a signal to stay away from the market alcohol.
In the UK it's of alcohol is attacks at the rates of 80% this tax effective for the government as it brings in a higher amount of revenue. Hypothecated taxes on a theory some economists slash policy because like to share and suggest how excess tax revenue can be used to promote healthier substitutes such as water through advertisement imposing these taxes may cause unintended consequences such as black markets in brackets the shadow economy as well and therefore adding taxes may seem as a good solution in the short run but in the long run there may be more structural issues than alcohol that government might have to address first.
Mark: 8/10
Comment: address the question more and improve my chain of reasoning in particularly for how taxes on alcohol can affect producers. “This means that”, “as a result", “this leads to” and “therefore” are some phrases that I should try to use more often.
Should a minimum price for alcohol be introduced in England and Northern Ireland [25 marks]
a minimum price can be implemented through the use of a price for this price floor has to be above the market clearing price of alcohol in order to be effective without adding a minimum price to alcohol may seem like a viable idea, as it desensitizes consumption, it may be seen as an example of governmental failure: a scenario where intervention may not necessarily be best for society
figure 2 highlights the impact of a price floor: as price increases from the macro equilibrium price to P1, the quantity demanded for alcohol decreases from QE to Q1.
Excessive drinking leads to negative consumption externalities which causes market failure leads to significant costs to social welfare these costs are imposed on two primary sectors healthcare and the justice system both systems have already accessories sources with the NHS taking 160 billion each year to fund itself if we also consider more long term issues with alcohol alcohol may be causing a reduction in productivity, especially with labor. I shall illustrate this using figure 3.
The ” harm principle” and other behavioral debates may be a counter argument to the maximum price of alcohol. The harm principle questions why is it government's responsibility to have control of over one choices. In addition consumers that already addictive to alcohol may find substitutes such as home brewing which may prove as a greater burden on healthcare services as these methods are often unregulated/untested/ my point about this shadow economy earlier links well here: inelastic demand for alcohol may mean substitutes such as dangerous risk taking methods may start to pop off more often policymakers may decide to have a look at the cross place elasticity of demand in order to calculate how to maximise efficiency in society(Adam Smith's principles of taxation may apply here)
the fact that these judgments are normative provide greater problems it's a market failure. A price floor may not be effective as it may be set too low causing simply little or no impact on consumption a price for that is set too high my wholesale cost like large scale supplies to retaliate and worsening economy in contrast smaller manufacturers may not be able to survive we also need to consider how alcohol taxes may affect the people on the lowest incomes the most: 30% of alcohol consumption is done by the lowest 5% of income tax earners in Scotland.
To conclude my argument there may be solutions attacking excessive alcohol consumption without effecting prices. For instance, increasing packaging showing the dangers of alcohol and attempting to educate the community may be more beneficial in the long run. A greater demand amount of regulation may also help, such as increasing the legal age to drink in a pub or buy alcohol. I don't know if you take 2 solution is for consumers to have to pay a greater tax for every unit of extra alcohol consumed. However, this may not be effective in a capitalist society such as the one that we live in.
Mark: 15/25
Comment: Needs more actual economics. Whilst the link to the behavioral economics was good, I need to explore classical arguments in more depth. Personally, not my best essay. Defo could have talked more economics, started to talk too much about the interesting bits(passion got the better of me).
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