Impact of imposing greater excise tax on alcohol products for minimisation of consumption
1.Impact of imposing greater excise tax on alcohol goods for minimisation of consumption:
The imposition of greater excise tax might result in fall of demand; even it might have meagre influence, since the demand is price inelastic for goods like alcohol. Primarily, the individuals addicted towards alcohol might keep on buying the product, despite the rise in product price and unavailability of substitute goods (Boyes & Melvin, 2013). Alcohol is primarily a demerit product and thus, the individuals might underrate the smoking costs. This denotes that the individuals consuming alcohol and addicted towards the same might ignore the damage of alcohol on their health. This could be termed as the reason to attempt restricting the individuals from the consumption of alcohol (Buckley, 2016). Along with this, the alcohol consumption and alcohol-based products have various negative externalities. The major impact of alcohol consumption is on the health of the individuals and their life longevity.
For example, the alcohol consumption results in increased crime rates, diseases related to heart and liver, increased accident rates and others. Thus, the social consumption cost pertaining to alcohol is primarily greater in contrast to the specific private cost. According to the provided case, if the entire social cost is higher than existing price, the entire social efficiency could be increased by compelling the people to incur for actual social cost (Dostál, 2013). As a result, the individuals might not be willing to incur additional expenses, which might reduce their overall alcohol consumption.
Figure 1: Impact of tax imposition
(Source: Galí, 2015)
According to the above diagram, D1 denotes the initial demand, while D2 denotes the initial supply. At the same time, P1 and Q1 denote the equilibrium price and quantity. However, with tax imposition, there is reduction in supply, as it shifts from S1 to S2. The price increases from P1 to P3 because of tax imposition and the quantity demanded falls from Q1 to Q3. Due to inelastic demand, higher price increase results in lower amount of fall in demanded quantity. The above diagram shows depicts the fact that tax imposition results in shift of supply curve from S1 to S2 resulting in fall of demand. Hence, with the decline in demand, the individuals tend to minimise their consumption level.
The position could be considered as socially efficient, since the social marginal cost is identical to the social marginal benefit at equilibrium (Gerber & Steppacher, 2014). Moreover, another advantage of raising excise duty on the part of the government is that it results in increased tax revenue. This could help the government of the nation in incurring greater amount of money on healthcare along with campaigns to inspire individuals for abstaining from alcohol. In opposition, this could result in minimising the tax rates like VAT. The matchless argument for increasing the excise duty is based primarily on normative judgement that alcohol consumption is injurious to the health of the individuals and the government has the necessity to interfere for minimisation of alcohol demand. However, the argument against tax imposition on alcohol goods is the inelastic demand for this product; thus, increase in prices for tax imposition could result in insignificant decline in product demand (Gillespie, 2013).
Impact of imposing minimum price on consumption related to alcohol products
The government could propose a minimal price for specific alcohol units. The minimum price is aimed at avoiding the selling of alcohol at a lower rate on the part of various supermarkets. The greater price could restrict the individuals from drinking and this would enable in improving health and compelling the individuals for incurring actual social cost of alcohol. On the contrary, the economists considering this to be unfair have stated that the regressive price could hurt the standards of living of the specific individuals having low income (Eiras, Harmon & Rossi, 2017). However, in case of alcohol overconsumption, it could result in various social issues like raised incidence of crimes, rising accidental rates, disorders in liver, premature deaths, various heart diseases and mental complexities.
Figure 2: Social alcohol cost greater than private cost
(Source: Granger, 2014)
According to the above figure, the social consumption cost related to alcohol is higher compared to the private cost. Hence, setting minimal price at a greater level at P2 compels the individuals incur the social consumption cost of alcohol. As a result, it would reduce the amount of consumption from Q1 to Q2. Hence, it could be stated that greater minimal price set on the part of the government could be considered as a significant factor in managing with the higher cost of consumption of alcohol issue. Hence, this discourages the consumers from overconsumption of alcohol.
Figure 3: Imposition of minimal prices
(Source: Laubach & Williams, 2016)
The above figure signifies the economics beyond setting minimal prices for the products of alcohol. In normal situations, the demand matches with supply at Pe, which is the equilibrium price and Qe, which is the equilibrium quantity. Primarily, the normal model of supply and demand asserts that minimal price is set exceeding the price of equilibrium, which could result in surplus situation. Surplus implies that the supply is higher in contrast to demand. In case of pricing of alcohol, this would not occur, as demand and supply are highly inelastic. In such case, the alcohol sellers would increase the price to P2 and this would be involved in the minimisation of quantity to Q1. Thus, this could result in considerable decline in various alcohol-related issues. However, there are several ways of averting these issues; setting greater minimal alcohol prices could exert different effects on minimisation of the entire product demand (Mitroff, Alpaslan & O’Connor, 2015).
The issue related to alcohol consumption could be minimised entirely through techniques of setting greater minimal price, since the demand for products of alcohol is highly inelastic. This depicts that price change results in minute change in the entire percentage change in demand, since the product is price inelastic. This is because the substitutes of alcohol are not present in the market and hence, for the addictive people, alcohol consumption is a necessity. As a result, the addictive individuals might keep on buying the products with increase in price (Schmithüsen et al., 2015).
2.a.The organisations having monopolistic competition do not function at their minimal average overall cost, as they operate with additional capacity.
Merits of increasing excise taxes compared to imposing a minimum price on alcohol products
Figure 4: Long-run equilibrium under monopolistic competition
(Source: Summers, 2014)
The above diagram depicts that the manufacturer would lose money, in case; they manufacture more for attaining productive competency. When the marginal cost is above the marginal revenue of $200, the firm would incur higher cost and it would earn additional revenue. Due to this, the manufacturers would increase their profits through production of quantity, in which the marginal revenue is identical to the marginal cost and charging price is at $200.
b.The oligopoly market structure is completely varying from the other market forms. The main features of the oligopoly market are demonstrated as follows:
In the oligopoly market structure, considerable modification in the policy of the organisation is most probable to develop an immediate effect on the other organisations available within the industry. Advertising is treated as one of the most powerful form of instruments in the oligopoly market. An organisation operating under the market structure of oligopoly could initiate the advertising campaign, which is aggressive, with an intention of capturing a significant market portion.
The interdependence of various organisations in the decision-making process is one of the primary features of the oligopoly market. For example, a small number of organisations, which are sizeable in nature, constitutes of the industrial element. One of these organisations is engaged in commencing the advertising campaign on large-scale or designing a new product for capturing the market. As a result, the competitors would initiate the campaign of advertising as countermoves. Thus, it denotes that the organisations are dependent closely with each other.
One of the most significant aspects is the group behaviour of the organisations under the oligopoly market. Each organisation has an idea of the actions of the other organisations and this would have influence on the group (Fourcade & Khurana, 2013).
Under the market of oligopoly, the number of sellers is limited and one move of a single seller generates an effect on the competitors. As a result, the sellers are needed to keep track on the actions of the rivals for countering their moves.
As there is intense competition in the oligopoly market, there is absence of barriers to entry for an organisation. However, in the long-run, there are limited barriers, which hinder the organisations from entering the industry.
The Australian banks like National Australia Bank (NAB), Westpac and Commonwealth Bank constitute of the oligopolistic market for ensuring stability of the banking system of Australia. The telecommunication organisations like NBN Co, Telstra Optus and Vodafone are the virtual operator brands, as these are falling under the oligopoly market structure. The modification in prices of the mobile network firms would help the competitors in modifying their strategies, as the cost structure of each firm is identical to each other.
c.The features of monopolistic competition are briefly summarised as follows:
In the market of monopolistic competition, many organisations are involved in selling identical products; however, homogeneity is not there in the products of the organisations. The organisations behave independently with living market share and the individuals have restricted control over the market place.
Impact of natural duopoly on market demand and cost curves
Each organisation is in the position of exercising a particular extent of monopoly with the assistance of product differentiation. The products of the organisations are close to each other; however, there is absence of perfect substitution.
The products and services are differentiated from each other under monopolistic competition and the variations are provided to the buyers in the form of selling costs (Svaleryd, 2015). Thus, the cost of selling comprises of substantial portion under the monopolistic competition.
Another feature of monopolistic competition is the independence of the organisations in making free entry or exit from the industry at any given time. This denotes that the firm has not suffered any abnormal profit or abnormal loss in the long-run.
The organisations like Woolworths Limited and Wesfarmers are the monopolistic competitive organisations in the Australian economy. The food retail organisations like Woolworths and Wesfarmers share 60% of the overall market share. The overall revenue amount that the organisation has posted denotes $75.9 billion with Wesfarmers and Woolworths sharing $30 and $51.9 billion respectively. BHP Billiton is a mining organisation, which occupies greater market share for being monopolistic with an overall revenue of $14.7 in the fiscal year of 2016.
d.Duopoly could be described as the market or form, in which two organisations have leading control over the market. The conditions that are crucial for the organisations falling under the oligopolistic market are depicted as follows:
- Independence
- Existence of two organisations
Figure 5: Duopoly demand curve
(Source: Webster, 2014)
In accordance with the above diagram of the duopoly demand curve, it is observed that if an organisation makes its entry in the duopoly market, it would manufacture at the level of Q1. This is because manufacturing at this level, marginal revenue would be identical to the marginal cost. This would help the organisation in charging price at P1, which is taken into account as the monopoly price (Gopinath, Helpman & Rogoff, 2014). As a result, the organization would be able to maximise its profit level. At the time the organisation B has entered the market, it would manufacture at the level of Q2 for maximising its revenue through charge of greater price. As a result, it would help the organisation in increasing its profit level in the operating market in the long-run.
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