Effect of Prices on Alcohol Consumption | Assignment Help
In the last 40 years, economists have focused their studies on the impact of alcoholic-beverage taxes, prices of alcohol and impact on consumption levels. There is an inverse relationship between the price of alcohol and its consumption. Studies have examined the effect of increase in prices on a wide range of health issues related to alcohol abuse, like heavy drinking, reckless driving, violence and sexual crimes, with an emphasis on high risk populations such as adolescents. The scope of the essay is limited to discussing the effect of alcohol consumption on the costs borne by the ones who do not drink. The essay discusses these costs and recommends policies that could induce alcoholics to reduce consumption to an optimum level.
Negative externalities:
Negative externality is a cost that is borne by a third party as a result of an economic transaction. Externalities refer to the spill –over effects of the transaction on third parties. Some examples of negative externalities are pollution, Alcohol Consumption by country or smoking (Miron, 2010). The market outcomes are inefficient when there are market externalities because the production levels are higher than the socially desirable limit. This is negative externality. In instances of positive externality, the quality of goods produced is lesser than the socially desirable limits. Increase in consumption of alcohol leads to increase in motor vehicle accidents, which imposes costs on people who do not drink (Elder et al., 2010).
Negative externalities on consumption:
The market equilibrium level of alcohol consumption, which is an example of negative externality, is reached when the net social costs exceeds the private cost. The optimum equilibrium for the society will be the point where the demand and supply reflect the social costs, that is private costs plus external benefits. An activity like alcohol production and consumption yields negative externalities in which case the socially optimal quantity is less than equilibrium quantity (Haavio & Kotakorpi, 2011)..
The above diagram represents the market equilibrium level of alcohol consumption. The net welfare loss indicated above can arise in two situations (Aronsson & Sjogren, 2010). When the marginal cost to society is greater than the marginal benefit to the society, welfare loss occurs, which explains negative externalities due to alcohol consumption. The loss also exists when the marginal benefit of any activity is greater than its marginal cost. The latter explains positive externality, where the market produces too little. Private optimum output (Q1) is where private marginal benefit = private marginal cost (0Gillespie, 2011). Social optimum level (Q*) is where social marginal benefit= social marginal cost. In the above diagram Q* indicates the social optimum level of output, while Q1 reflects private optimum output level (Freebairn, 2010). In this case, private optimum level is more than social optimum output level, thereby indicating negative externalities leading to market failure (Elder et al., 2010). The situations in which the marginal social benefit will be less than the marginal private benefit leads to over-consumption relative to the socially optimum level. The area indicated as ‘potential welfare loss’ in the diagram is also called the dead weight loss of economic welfare. At this point government intervention is required to increase the price of goods or services that have negative externalities (Haavio & Kotakorpi, 2011).
Policies adopted by the government:
The policy makers and the private players strive to frame policies that would regulate the consumption of alcohol to optimum level. The marker inefficiency created by a high consumption of alcohol can be remedied by the government in the following ways:
Regulation – The government can adopt command and control policies that will deter the drinkers from consuming alcohol. Certain behaviours like consumption of alcohol is forbidden or regulated by certain government directives. For instance imposing fines on individuals who drink and drive is one such example (Elder et al., 2010).
Market based policies – In addition to the behavioural regulations imposed by the government, the market based policies like corrective taxes also help in regulating consumption of alcohol. Government can curb negative externalities or try to internalise it by imposing taxes or offering subsidies on activities that have positive externalities. Taxes enacted with the aim of reducing negative externalities are called corrective taxes (Alm & Banzhaf, 2012). Contrary to other taxes that move the allocation of resources away from the social optimum, corrective taxes tend to move the allocation of resources the other way round. In other forms of taxation, there is a reduction economic well being owing to a deadweight loss. When externalities are present, the society engages in maximising social welfare. These taxes increase the government’s revenue and improve economic efficiency (Babor, 2010) .
Taxation:
Increase in federal or state taxes are aimed at promoting public health by reducing drinking, controlling abusive drinking and its ill-effects. Most studies indicate that adolescents and young adults are more responsive to changes in prices of alcohol resulting from increased taxation, than the general public. This essentially means that imposing taxation may not produce positive results immediately; however, in the long run the measure will defiantly yield positive results (Xu & Chaloupka, 2011). The economic costs that arise from the consumption of alcohol provide a strong incentive to raise the taxes imposed on the alcoholic beverages. Studies from economic data shows that the economic costs of alcohol consumption per capita far exceeds the amount collected through taxes (Feldstein, 2011). The current excise taxes on alcohol is far below the optimum level, when external costs borne by non-drinkers or moderate drinkers are taken into account. Studies indicate that Federal and State taxes should be increased to keep up with inflation and reach the optimal level. Indexing alcohol taxes to the current rate of inflation in order to prevent any reduction in the real taxes rate would ensure that higher taxes yield positive results (Freebairn, 2010).
Conclusion:
From the above essay, it can be concluded that a sizeable increase in excise taxes imposed on alcoholic beverages will have a positive impact on reducing the health, economic and social costs and consequences of alcohol consumption and abuse. The essay suggests that alcohol consumption exhibiting negative externalities tends to increase the social and economic costs that are borne by the non-drinkers or the ones who consume in moderate quantities .The solution, to reverse negative externalities, mainly rests on the government. The increase in excise taxes and other regulatory controls assure a positive impact in the long run.
References
Aronsson, T., & Sjogren, T. (2010). An Optimal-Tax Approach to Alcohol Policy. FinanzArchiv: Public Finance Analysis, 66(2), 153-169.
Alm, J., & Banzhaf, H. S. (2012). Designing economic instruments for the environment in a decentralized fiscal system. Journal of Economic Surveys,26(2), 177-202.
Babor, T. (2010). Alcohol: no ordinary commodity: research and public policy. Oxford : Oxford University Press.
Elder, R. W., Lawrence, B., Ferguson, A., Naimi, T. S., Brewer, R. D., Chattopadhyay, S. K., … & Fielding, J. E. (2010). The effectiveness of tax policy interventions for reducing excessive alcohol consumption and related harms. American Journal of Preventive Medicine, 38(2), 217-229.
Feldstein, P. J. (2011). Health care economics. New York : CengageBrain. com.
Freebairn, J. (2010). Special Taxation of Alcoholic Beverages to Correct Market Failures*. Economic Papers: A journal of applied economics and policy, 29(2), 200-214.
Freebairn, J. (2010). Special Taxation of Alcoholic Beverages to Correct Market Failures*. Economic Papers: A journal of applied economics and policy, 29(2), 200-214.
Gillespie, A. (2011). Foundations of economics. Oxford : Oxford University Press.
Haavio, M., & Kotakorpi, K. (2011). The political economy of sin taxes.European Economic Review, 55(4), 575-594.
Miron, J. A. (2010). The budgetary implications of drug prohibition. Cambridge : Harvard University.
Xu, X., & Chaloupka, F. J. (2011). The effects of prices on alcohol use and its consequences. Alcohol Research and Health, 34(2), 236.
