Elasticity estimates for alcohol consumption
Implications of imposing higher excise tax on alcohol products for minimizing of consumption
The imposition of a higher amount of taxes may often lead to decrease in the overall demand, although it may be considered to be having a little effect, in general the demand is seen to be price inelastic in cases of products ranging from products such as alcohol. The individuals who are seen to be addicted to a certain product may continue purchasing the item even when the price goes up and there is no close substitute for it. Alcohol is mainly identified as a demerit good. Hence, it is imperative for the individuals to underestimate the overall costs of smoking. This further implies people consuming alcohol are seen to be addicted to a particular product, which may be disregarded as the damage, which may be caused to their health. This can be further considered as a good reason for the individuals to stop consuming for their own benefit. It has been further seen that the consumption of alcohol-based products has different negative externalities. For example, the consumption of alcohol often leads to increased chances of heart attack, liver damage and rate of crime and accidents on the road. Therefore, the social cost of the consumption is seen to be higher than the private costs. In the given scenario, it has been seen that the social cost for the consumption is seen to be higher than the current pricing and the social efficiency and this can be seen to be raised for making the people pay for the actual cost incurred as a social cost (Postlewaite, 2014).
Based on the figure shown below, the initial demand is seen to be represented by DI and the initial supply is seen to be discerned in form of D2, where the equilibrium and the quantity Q1 and P1 respectively. Although the tax imposition, results in reducing the supply this is shown with a shift from S1 to S2. As the price, increases from P1 to P3 for the imposition of the tax and the quantity, which is demanded, reduced from Q1 to Q3. It has been further seen that as the demand is seen to be inelastic, with an increase in the price there is lesser chance of fall in the quantity demanded. The figure shown below further shows that the imposition of the tax often leads to the shift in the supply curve from S1 to S2. This leads to decline in the demand of the product(Chavas, 2013). This is seen to be further related to socially efficient position of the equilibrium and social marginal cost. This is seen to be equal to the social marginal benefit. Hence, this is seen to be considered as another benefit of the increasing the excise duty by the government for the alcoholic products. It is further seen that it leads to augmented tax revenue (Green, Bean, & Peterson, 2013). This can be further regarded to enable the respective government of the nation to spend high amount of the money, in the overall healthcare as well as campaigns for inspiring the people to keep away from alcohol. In the other scenario, this can also lead to decreasing the rates of taxes such as VAT. Subsequently, the argument related to raise the excise duty is seen to be essentially based on the various types of the normative principles of the judgement, which states that alcohol is bad for health of the people and the respective government, for the reduction of the demand for the good. Although, it needs to be further noted that the tax imposition on the alcohol product’s demand is seen to be highly inelastic in nature for this good, hence an increase in the price due to imposition of the tax leads to a very insignificant fall in the demand for the product(Lin & Dunphy, 2013).
Demand-Supply analysis of excise tax on alcohol products
Figure: Effect of tax imposition
(Source: Olitsky & Cosgrove, 2016)
Implications of imposing a minimum price on alcohol for the consumption of alcohol products
The Government is seen to propose a minimum price for the particular unit of the alcohol. The Government has the option to propose a minimum price at averting the sale of alcohol at reduced rate by different supermarkets. It can be further seen that the increasing price can discourage drinking and have a better social and health implications. On the other hand, it has been further seen that the economists who are seen to argue is considered to be unfair and add to the regressive price, which can further affect the living standards. Although, the overconsumption of the alcohol is seen to create different types of social problems which is seen to include the increased cased of the negative implications(Sándor, 2014).
The figure given below depicts that the social cost of the alcohol consumption is identified to the more than overall private cost. The minimum price at a higher level that is at P2 makes people pay the social cost of consumption of alcohol. This also reduces the quantity of consumption from Q1 to Q2. Hence, that higher minimum price set by the government can be considered an important factor in handling with greater cost of alcohol consumption problem.
Figure 2: Figure showing the social cost of alcohol that is higher than the private cost
(Source: Katzner, 2015)
The diagram shows the economics behind setting minimum prices for alcohol products. The normal condition, equalises the demand with the supply at the equilibrium price of Pe and at an equilibrium quantity Qe. This is essentially, seen as a normal demand and the supply model assortment and the equilibrium price can further lead to a situation with surplus. The surplus is further considered greater than the demand. Although, it needs to be taken into account while pricing of the alcohol this is not regarded as well as demand are both very much inelastic. From the seller’s viewpoint, this will lead to increase in the price P2, and reduction of quantity to Q1. Hence, this is considered as a considerable decrease in the different types of alcohol associated problems. Although there are seen to be many ways to avert this problem by setting of high minimum process for the alcohol products and this can exert considerable reduction in the overall demand of the product. Although, the problem of the alcohol consumption cannot be reduced totally, this can be seen to be reduced by setting a minimum higher price as the demand for the alcohol is seen to be inelastic in nature. This further depicts that a small change in the price leads to even a smaller change in the overall percentage of the demand of the product due to the inelastic nature of the price. This is also because of the fewer availability of the substitutes of the product and consumption of addicted people can be seen to be necessity. Hence, with an increase in the in the price the people can be still addicted to purchase the product.
Effects of minimum price on alcohol consumption
Figure 3: Imposition of minimum prices
(Source:Mazzoleni & Nelson, 2013)
The firms under the monopolistic competition are seen to be not having function at the minimum average total cost as they operate with excess capacity.
Figure 4: Long run equilibrium under monopolistic competition
(Source: Cameron & Trivedi, 2013)
The above figure shows that the manufacturer would lose money in case they produce either allocative or productive competency. Here, the marginal cost goes above the Marginal revenue of $200, hence the firm would incur a greater cost and it would receive additional revenue. This is identified as the primary reason for manufacture to maximize the profit where the MR is seen to be equal in terms of the charging price at $200 (Iossa & Martimort, 2015).
The oligopoly structure of the market is seen to be different from the other forms of market. The characteristics are discussed below as follows:
Interdependence: This is related to numerous process of the decision-making. For example, in case a small number of firms sizeable in nature the element of the industry it will provoke countermoves among the rivals.
Advertising: As per the oligopoly market, the major changes in the policy are most likely to have an impact on other firms operating in the industry. Advertising is considered as one of the powerful instrument for the oligopolistic market (Yudkowsky, 2013).
Behaviour of firms: Based on this the most important aspect is seen as group behaviour. Hence, irrespective of group number each firm knows the implication of the impact on the other firm(Norman et al., 2013) .
Competition: Under this market structure, there is only a small number of sellers and only a particular move by the immediate impact on the rival. This also enables each seller to keep a close watch on the rival’s decisions(Tubaro, 2015).
Barriers to entry: As there is a keen competition in the oligopoly industry, there have been no barriers to entry or exit from the firm. Although there has been few barriers in the long run which may prevent firm from entering in the long-run.
Banks like NAB and Westpac and common wealth assures the stability of the banking system in Australia. Mobile service providers like Telstra Optus, NBN Co, and Vodafone are lagging behind in oligopoly market structure (Norman et al., 2013).
The characteristics of the monopolistic competition are shown below as follows:
Large number of Sellers: It has been seen that there is many firms whose selling closely associated goods. Although they are not seen to be similar each firms are seen to act independently having to living number of individuals who have limited control over the market place and living number of the market share.
Merits of excise taxes vs. minimum price on alcohol products
Product differentiation: The individual firm are seen to be in a position to exercise a particular degree of the monopoly with the help of product differentiation. The products of the firms are further seen to be closely related to close substitute of the products of the firms.
Selling price: As per the monopolistic competition, the goods and the service are seen to be differentiating based on the buyers through the seller’s cost
Free entry or exit: Free entry and exit characteristics under the monopolistic competition are seen to be essential freedom during any entry or exit at any time. It suggest that the there has not been any abnormal profit or loss suffered by the firm in long run.
Companies like Woolsworth and Coles are further seen to be falling under competitive firms in the Australian economy. Coles and Woolworth share nearly 60% of the total market share among themselves. The total revenue of these was seen in terms of the company amid them, represents $75.9 with Coles and Woolworth sharing $30 and $51.9 billion respectively (Postlewaite, 2014).
Duopoly can be identified to pose major control over the market. Some of the necessary conditions for the oligopoly firms are listed below as follows:
- Existence of only two firms
- Independence
Figure 5: Duopoly demand curve
(Source:)
It can be understood that in duopoly market the firm will produce at Q1 level because producing in this level as per the marginal revenue will be same as marginal cost. This will enable the firm to agree at price P1, this is considered as the monopoly price. This is seen to helpful in terms of maximising the total profit. It has been further seen that in case Company B enters into the market, it will produce at Q2 level in order to maximise their revenue and charge higher price.
Figure 6: Figure stating Duopoly cost curve
(Source: Ahlersten, 2013)
The figure above shows the produced output by the company to produce at quantity Q1 and the price rise up to level of P1. The will depict the ideal time required for both the firms and the joint production by both the firms which represents monopoly output and charge monopoly pricing. By taking into account, the pre-assumption of the equal cost is zero, the market will be equally shared between the firms and eliminates the entry for the third firm(Frank, 2013).
Reference List
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