Price Elasticity of Demand - Assignment Example

ECNOMICS ASSESMENT Question Some economists argue that one of the key political motivations for the introduction of the alcopops tax is to correct for the negative externalities which abusers of alcopops impose on society. Using diagram(s) discuss how a tax on alcopops can correct for negative externalities associated with excessive consumption of alcopops. Answer A high rate of tax imposed on alcohols is because of the removal of negative externalities imposed on the society by the users of alcopops. The aggressive amount of tax imposed on the alcopops reduces the purchasing power of people and thus discourages the people to drink more and more of a product. Positive externalities exist when the marginal social benefit of production and consumption is more than the marginal private benefit. An externality is an affect of a purchase or consumption decision of a particular product by one party on the other party who has no choice but to live with that. The imposition of higher tax rates on alcopop products results in the elimination of negative externalities of the alcohol abusers. With the imposition of higher taxation rates on alcopop products, the marginal social benefit would be higher than bore and the marginal private benefits of the alcopop producers will reduce. Thus, discourage the consumers to consume more and more of a product who have to pay more for consuming the product. This effect has been shown in the above diagram in which it is clearly shown that how imposition of high tax rates on the product can affect the consumption and production of products causing negative externalities. In the above diagram social benefits are increasing and the high tax rates have also brought the demand of the product down, therefore, now excessive drinking will be avoided by people because it will become too much expensive to afford. The advantage of imposition of higher tax rates are that it provides incentives for removing the negative externalities of excessive drinking, increases social efficiency and also increases revenue for the government. Question 2 Do you expect the demand for alcopops to be elastic or inelastic? Why? How about the elasticity of supply of alcopops? Answer Demand of products like alcopops is most of the times inelastic as those customers who are addicted to these products will not compromise on the consumption of these products, doesn’t matter how much price they have to pay for the getting hold of the product. This means that the consumers will still buy the product at the higher costs despite the increase in the cost of the product. However, the increase in the price is deemed to affect those customers who have less income and they also have to pay for purchases of other goods and services. For such customers, the demand will be fairly elastic as with no increase in their income they will find it extremely hard to buy the alcopops in larger quantities. Thus, it can be said that the cumulative effect of the imposition of higher tax rates will be the elastic demand of alcopops. Consumers will reduce the consumption of alcopops up to some extent. This way the sales of alcopops will diminish as consumers will still buy the alcopop products but not in the bulk quantity as they were buying before the increase in the prices of alcopops. The elasticity of supply of alcopops will be determined with respect to the elasticity of demand of these products which is suspected to show a slight deflection, however, the elasticity of both demand and supply is not expected to show a huge deflection and thus the goods will be supplied at the previous quantity supplied more or less. Question 3 If your answer about the price elasticity of demand and supply is right, then will the burden of the new sales tax be borne more by suppliers or more by consumers? Explain. Answer The affect of price elasticity of demand and supply will not resolve the problem of burden of new sales tax. Sales tax is always borne by the end consumers of the product who utilize the product. With the increase in the price of a product due to the increase in the amount of sales tax imposed on the alcopops, the ultimate burden of price hike will be borne by the consumers. The law relating to the sales tax is that, whenever, sales tax is levied on any product then the suppliers will supply the product at their cost s added the increased percentage of sales tax and that added amount will be transferred to the consumers of the product. Thus the question of facing the brunt of more sales tax by consumers or suppliers is an absurd question as only consumers will bear all of the extra tax imposed by government on the alcopop products. It is the end consumer who will have to pay more for the attainment of alcopop products and suppliers will have the same amount of profit which they were having before the tax was imposed on these products. However, the change in the amount of consumption of these products will determine the final profit of alcopops manufacturers which can be different than prior to imposition of taxes. Question 4 Now we assume that the alcopops industry is perfectly competitive and the alcopop products are identical. We also assume that before the tax was imposed, alcopops producers earned zero economic profit. Discuss the impact of the alcopops tax on the short-run cost and profit of a typical alcopops producer using diagram(s). Answer In this scenario, we have to assume that the alcopops industry is perfectly elastic and that the alcopop products are identical. With this assumption it can be said there will be no affect on the alcopop products due to their names, however, the sale will depend heavily on the price and percentage of profits charged by the manufacturers on their products. Any manufacturer charging less than the other manufacturers will see an increase in the amount of sale of his products. This is the rule of perfectly competitive market that the sellers have to compete in the market either by use of the tool of reduced prices or by any other mean possible in order to gain advantage over its competitors. There is also another assumption and that is the alcopop producers were earning zero economic profits from the sale of their products before the imposition of higher rates of tax imposed by the government on these products. If this is the case then the profit margins of alcopop producers are going to decline with increase in prices because the quantity of sale is deemed to show a change downwards and thus reducing the profits of the alcopop producers. The above diagram shows the total revenue and total costs of the firms producing alcopop products while being in the perfectly competitive market. Each firm will see an increase in the total revenue of the firm but a decrease in total profit of the firm and this is mainly due to the fact that the firms will earn more revue due to increased sales tax collection. In the perfect competition, every firm will desire to earn maximum amount of profit as this is the psyche of the businesses and their primary motive. Maximum profit will be achieved by operating at the point at which firms earn the most from sales of their product. They will supply up to that point which ensures maximum profit and not more or less than that point. Question 5 Based on your answer to Question 2, explain whether or not the alcopops tax is an effective way to battle binge drinking. Conduct a brief review of recent literature on this issue to support your argument. Use a supply and demand model to explain how ‘alcohol education and treatment and rehabilitation programs’ suggested by Dr Nelson can reduce the consumption of alcohol by youth. Discuss which is a better idea to counter youth binge drinking, an alcopops tax or an education campaign that stresses that binge drinking results in poor health? Answer According to the studies made, imposition of higher rates of tax on alcopop products is not the most effective way of battling the binge drinking problem. Although many governments have done so and it was deemed to is the most helpful way of discouraging the excessive drinking habits of people especially the youth of the nation. According to Australian Medical Association (AMA) and the address of the President of AMA Mr. Bill Glasson, there is a great trend of binge drinking among the Australian youth and this is mainly due to the peer pressures and due to the fact that kinds are much more inspired by the whole new idea of drinking excessively in their youth age. According to the study conducted by Victorian Youth Alcohol and Drug Survey, young generation starts younger, drinks more, and indulges in binge drinking at an unprecedented rate. Kids are now starting to consume alcohol at the early age of 14 years and they are not well aware of the harms their drinking habit implies on their health. One of the major problems with binge drinking is that it is becoming socially accepted these days and youth is not discouraged from indulging them in binge drinking. When people indulge in binge drinking, usually on weekend, they don’t seem to care about money and purchase drinks at higher costs. So, binge drinking is difficult to reduce only by imposing taxes rather awareness programs should be introduced along with the higher tax rates. Australian Medical Association is also aiming to work with government and alcohol producers for raising awareness in the public about the menace of binge drinking. Alcohol education and treatment and rehabilitation program suggested by Dr. Nelson is a very effective program in fighting with the devil custom of binge drinking in the society. With this program, people will be aware of the harms of binge drinking on their health and life in general. With the increase in price of alcopops and with awareness among people about harms of binge drinking, demand of alcopops will reduce and thus the supply of alcopops will also be affected. This will effect in the determination of new equilibrium point for the supply and demand of the alcopop products. A general decrease in the sale of alcopops will be witnessed due to the price hike as well due to the alcohol education and treatment and rehabilitation program. With the discouragement of binge drinking from more responsible people in the society and from the role models of the society, people will detest the very idea of binge drinking even if they are coerced by their peers. This will directly affect the aggregate demand of alcopops in the market and the demand of these products will reduce sharply. With the decrease in the demand of these products, a sharp decline will be seen in the supply of these products and this will continue until a new equilibrium point is given to the alcopops industry. Many governments have tried to impose grave amount of taxes on the alcohol products but it has been observed that the demand for these products do not change or changes faintly and people keep on consuming these products at the same rate as previously. This trend shows that the imposition of taxes on these products is not sufficient for abstaining users from the menace of binge drinking. Thus, for this purpose, alcohol education and treatment and rehabilitation programs are necessary in order to discourage the masses from binge drinking. People should be afraid of the consequences of binge drinking and this is the only method to stop them from binge drinking. Imposition of higher taxation rates is a very good step for discouraging the masses from binge drinking but it will be proved beneficial only when alcohol awareness programs are introduced in the society by government and NGOs. Thus, it will be in the larger interest of society if both the aggressive taxation programs and alcohol awareness programs are employed by the government to fight the evil of binge drinking. References: 1. John Sloman (2001). Economics. Pearson Publishing 2. Collin Bamford. (2003). As and A Level Economics. Cambridge University Press. 3. Lipsey and Chrystal. (2002). Economics. Oxford University Press. 4. Manuel G. Velasquez (2001). Business Ethics: Cases and Concepts. Prentice Hall 5. Brue and McConnell. (2003). Economics. McGraw Hill 6. Richard L. Daft. (1994). Management. The Dryden Publishing 7. Moynihan. (2003). Economics. Oxford University Press. Read More