Key Aspects of Drinking and Economy - Essay Example

Drinking and Economy Hewlett-Packard Explain why excess alcoholic consumption was not only a personal issue but also a public health issue even in the late 19th and early 20th centuries. National statistics reveal lost productivity as the chief social cost related to alcohol consumption. The loss in both the quality and quantity of work was a crucial underlying factor behind the Temperance movement in America. Practical experiments demonstrated the adverse effect of alcohol on the nervous system, and suggested that avoidance of alcohol before and during working hours ensued in escalated productivity and co-ordination. Furthermore, lower consumption led to a drastic downfall in the accident, absenteeism, irregularity rates and on average increased the working life of workers. Besides productivity, past drinking is detrimental to health status. Psychological and physical dependence on alcohol causes impairment while at home or work. Likewise, Alcohol abuse triggers risky behaviour. Mullahy and Sindelar established a direct co-relation between alcohol abusers and dependents with lower rate of employment and earnings (Mullahy & Sindelar, 1993). Another empirical research conducted by Mullahy and Sindelar exposed alcoholic consumption amongst teenagers to be a chief contributory factor in terminating school, and consequently future income (Mullahy & Sindelar, Life cycle effects of alcoholism on education, earnings, and occupation, 1989). Alcoholic dependence hampers academic performance, reducing future human capital; thus, funds that are more public have to be diverted to provide incentive to continue (Cook & Moore, 1993). Another imperative factor to be borne in mind is that studies have found per capita alcohol consumption to have an immense influence over rape, homicide, criminal, heart disease, cancers, cirrhosis, and myriad other personal and social plights. Hence, the state is compelled to invest larger funds in providing medical care and public safety. This has an opportunity cost as those funds could have been spent to grow the economic potential; hence, accelerate economic growth. Overall, it affects both, the micro and macro-economic systems. 2. Explain why people may make seemingly irrational decisions to consume excessive alcoholic drinks. Although most individuals resolve to abandon alcoholic dependence, yet time inconsistency hinders them in executing this decision. This procrastinating behaviour is further promoted due to peer pressure that significantly influences erroneous decisions. In particular, alcoholic consumption accelerates amongst individuals when social milieu deludes the individual into thinking of it as a small change, but overtime developing it into a dominating behavioural pattern (Akerlof, 1991). Another hypothesis by Becker and Murphy advocates that forward-looking consumers may indulge in an addiction of a good to maximize the utility derived (G.S. & Murphy, 1988). Despite the fact that consumers are knowledgeable of the addictive nature of certain goods, but they still might prefer it as the gains from consumption exceed costs of future addition. In plain words, current utility will escalate with an increase in consumption. However, it goes on to state that after an individual realises his stockpiling habit of a harmful commodity, rationality will come into play in order to establish normal consumption level. Another model by Gruber and Kasseri suggests that smoking preferences are time inconsistent, as individuals fail to identify the very difficult in quitting addictions (Gruber & Ko¨szegi, 2001). In addition, they also determined that an increase in tax leads to more sales yet reduced consumption as consumers stockpile harmful goods for future consumption. 3. Provide the economics rationale why prohibition as a government intervention was necessary to correct people’s seemingly irrational behaviours (in this case, consuming excessive alcoholic drinks.) Undeniably, excessive alcohol consumption is the root cause of myriad socio-economic and health-related predicaments. It ensues in lower productivity, disability, more crimes, and family problems, escalated morbidity and the like consequences. This compels the government to spend disproportionately on medical care and disability benefits thought the Social Security system. Empirical studies have exposed drinking to be the most crucial factor behind low productivity, earnings, employment, high dropout rate etc. Thereby, prohibition was necessary in order to reduce costs of continuance associated with education, to accumulate and improve future human capital. Likewise, lesser alcohol consumption before or during work hours positively contributes towards accelerated productivity, co-ordination, longer and healthier working lives etc. Hence, the government was forced to impose prohibitive policies in order to maintain productivity, discourage irregularity, absenteeism, accidents, crimes and the like. Another economic justification for prohibiting alcohol was to curtail social costs associated with crime, corruption, and the tax burden due to prisons, poor health, and hygiene prevalent back then in America. Thus, social costs/externalities stemming out from excessive alcohol consumption necessitated prohibition. 4. Without reading further materials about the history, use your economics intuitions to analyze why this policy (i.e. Prohibition) failed at the end. Some economists contend that government intervention in free markets proves futile in increasing social welfare. The prohibition policy ended as a failure since the demand for alcohol was inelastic. This meant that price or other factors did not have a significant influence over the demand for alcohol. While supply was restricted, demand was still high, as addictive commodities often become necessities. Thus, this unsatisfied demand ensued in the creation of a black market for alcohol. Since the black market is hidden and unregulated, so the quality of goods gets lower, and crimes become more rampant as it is illegal. Another side effect of unsatisfied demand is that consumers start looking for alternatives, which in this case include even more dangerous and fatal drugs. In addition, implementation of policies results in a drain of tax revenue and escalates government spending. 5. Propose a policy intervention to reduce excess alcoholic consumption, as you were a government policy maker in that era. Be sure to provide your economics rationale. In consideration of the innumerable socio-economic and health predicaments resultant from alcohol consumption, the government needs to defray alcohol-related expenditure from public revenues like alcohol taxes. A tax on the consumption of the good should be at least equal to the external costs, hence holding the person responsible for the externality and leading to socially optimal consumption (Baumol, 1972). This approach is justified in the light of economic efficiency and equity, which require recovery of external costs associated with alcohol consumption. However, taxes should be consistent across all states otherwise there is a of interdiction accelerates. Moreover, salience of taxes plays an integral role, as tax added in the total price list at the register is lesser effective tan product tax as consumers carefully decide what to buy. Pigoy advocated that taxes should be designed in a way as to determine a socially optimal level of consumption. In addition, the point of time inconsistencies should be taken into account while determining the appropriate level of tax. This suggests that the government should not only consider the externalities that addicts inflict on others, but it should also consider the internalities or personal problems imposed by addicts on themselves. 6. Evaluate this proposed policy in e) and determine if it would be successful or not. Why or why not? An increase in price will deter binge alcoholism. This policy is supported by practical research in which the state levy of beer-tax rate negatively influenced the rape, physical child abuse, robbery, teen abortion, gonorrhoea, suicide, motor vehicle mortality, accident, absenteeism rates (Cook & Moore, 1993). Several authors emphasize the extension of corrective taxes as consumers of harmful goods normally underestimate the internal costs of such consumption. A tax increase would then help them in finding their true preference or appropriate consumption. However, the primary problem associated with addictive goods is that their demand tends to be inelastic as individuals lack self-control to curb their consumption of such harmful goods. This implies that an increase in price due to imposition of a tax will be more than the decrease in consumption/demand. Moreover, in imperfect competitive markets, manufacturers may raise prices more than actual tax increase, to reap higher profits. In addition, the probability of emergence of a black market is significant when demand is not met by supply. Alcohol can be easily made at home and even smuggled across borders. Moreover, levy of beer taxes in a state did not cut down the homicide and assault rates; thus, the policy failed in those areas (Cook & Moore, 1993). In addition, indirect taxation on such harmful commodities has often been viewed with suspicion, as the government used it more for accumulating public revenue than deterrence. References Akerlof, G. (1991). Procrastination and obedience. American Economic Review , 1-19. Baumol, W. J. (1972). On taxation and the control of externalities. American Economic Review , 307-322. Cook, P., & Moore, M. (1993). Drinking and schooling. ournal of Health Economics , 411-429. G.S., B., & Murphy, K. (1988). A theory of rational Addiction. Journal of Political Economics , 675-900. Gruber, J., & Ko¨szegi, B. (2001). Is addiction “rational”? Theory and evidence. Quarterly Journal of Economics , 1261-1303. Mullahy, J., & Sindelar, J. (1993). Alcoholism, work, and income. Journal of Labor Economics , 494-520. Mullahy, J., & Sindelar, J. (1989). Life cycle effects of alcoholism on education, earnings, and occupation. Inquiry , 272-282. Read More