Term Paper on "Supply, Demand and the Excise Tax"

Term Paper 6 pages (1910 words) Sources: 10

[EXCERPT] . . . .

Supply, demand and the excise tax on alcopops

The simple law of demand and supply states that the retail price of a specific commodity is a direct determinant of the customers' as well as company's responses. In the case of a low retail price, the consumers enjoy an increased access to the product and as such the levels of demand are higher. On the other hand however, when the price of the commodity is low, the drive of manufacturers in producing and selling the item is limited as the profitability margins on the respective product are limited. This specifically means that the supply of the respective product would be rather decreased.

In the opposed situation, of a higher retail price, the producers would be better stimulated to manufacture and sell the respective item as they would register higher levels of profitability. However, the retail price of a commodity represents a barrier in the access of customers to the respective items. In other words, the demand for the respective commodity would register a downward trend.

At the general level, equilibrium is reached when the supply curve intersects the demand curve, in other words, when the demand equals the offer. The diagram below reveals:

The supply and demand model diagram, source: Zahablogs Economic World

Given this understanding of demand and supply, it is expected that the introduction of an excise tax would increase the retail price of the alcopops, reducing as such the access of consumers, and as such the consumption of the items. The rationale behind this action would be the better protection of human life through the reduction of alcohol consumption, rationale which is also implemented with the introduction of alcohol education, treatment and rehabilitation.

Question 2: Elasticity of the demand for alcopops

At a broad level, the elasticity of demand is understood as the means in which a change in price materializes in a change in the demand for the respective commodity. In the case of an elastic demand, an increase in the retail price materializes in a decrease in the demand. Vice versa, with an inelastic demand, the price increase would not materialize in major modification in the levels of customers' demand for the respective product or commodity. The two diagrams below reveal the curves for the elastic and inelastic demands:

Source: Investopedia, 2010

The consumption of alcopops is expected to be elastic as this category of products is not absolutely necessary for the population, nor is it habitual. It in fact is a complementary product and its consumption is expected to decrease as its retail price increase. In the case of alcohol however, its elasticity is rather rigid and this is because the products are of habitual consumption, meaning as such that the individual will continue to consume them even when their price increases (Riley, 2006).

Question 3: Price floor on alcopops

A price floor refers to the setting of a minimum price -- either through governmental intervention either through industry agreements -- at which to retail a specific product. As shown in the diagram below, the floor price can be either below the equilibrium price, either above it.

Price floor diagram, Source: College Cram

In the first scenario, when the floor price is established below the equilibrium price, the action generates no impacts upon the industry or the market. In other words, the consumption of alcopops would not suffer alterations if a price floor is set below the equilibrium price between the demand and the supply.

In the second scenario however, when the price floor is higher than the equilibrium price, the price of the product would increase, decreasing as such the demand for the respective item. In the case of the alcopops, the price floor would materialize in lower levels of consumption. "A high price floor forces consumers to pay a higher price decreasing the demand and even eliminating some consumers from the market. Producers on the other hand now charge more for the product and increase supply. The decrease in demand and increase in supply due to the new imposed higher price creates a surplus of the product" (College Cram).

Question 4: Education and alcopops in a perfectly competitive market

In a perfectly competitive market in which the educational program to reduce alcohol consumption succeeds, the profits of an alcopops producer would significantly decrease. The future ability of the respective producer to sustain business operations depends on a series of individual characteristics, such as financial strength, operational diversity and the sale of other products aside from the alcopops, size of the customer market and so on.

In the short run, the profits would gradually decrease as the educational program takes effect. In the long run, the producer's profitability would suffer additional demises as more and more consumers renounce or reduce their alcohol consumption. It is not nevertheless expected for the alcopops producer to be eliminated from the market as the consumption of alcopops is not expected to be entirely eliminated. Due to the nature of the products, they are expected to maintain their popularity at special occasions, even if their home consumption decreases.

Essay Question: The effectiveness of the excise tax on alcopops

The alcopops are extremely popular among the young group of consumers. The ethics of these beverages are, to say the least, questionable. Due to the fruity flavor and the sweet taste, the alcopops are preferred by the young consumers, who are generically too young to consume alcoholic beverages. The introduction and sale of the beverages has created tremendous debates both in the United States of America as well as in other global regions, including Europe or Australia. Several efforts have been made with the attempt of reducing the consumption of alcopops and these revolve primarily around stricter labeling or the introduction of taxes to increase the retail price and as such restrict the easy access of underage individuals to the alcoholic beverage.

The main reason for the increased interest in reducing the consumption of alcopops is constituted by the general assimilation of alcopops with binge drinking in youth. The problem of binge drinking is increasing in severity. Within the United States, binge drinking is understood as the consumption of high amounts of alcohol with the intent of becoming intoxicated. According to the National Institute on Alcohol Abuse and Alcoholism, binge drinking is represented by the consumption of more than five drinks on at least one occasion throughout the previous month. A trend in binge drinking cannot be established throughout the United States as the values are different across state. In Vermont for instance, binge drinking has decreased from 21.3 per cent in 1990 to 17.2 per cent in 2003. In South Dakota on the other hand, it had increased from 15.9 per cent in 1990 to 19.0 per cent in 2003 (National Institute on Alcohol Abuse and Alcoholism). An alarming trend is however constituted by the decreasing age of binge drinkers, trend which is supported by the alcopops.

A study conducted by the Center for Disease Control and Prevention for instance revealed that the highest proportion of binge drinkers is constituted by the 18-20 years old age group. Binge drinking is more common among men than among women and binge drinkers -- regardless of gender -- are 14 times more prone to report alcohol impaired driving as a result of intoxication. In terms of the youth's consumption of alcohol, 90 per cent of it takes the form of binge drinking. Regarding the impacts of binge drinking, these materialize in a series of health conditions, such as liver damage, increased risk of cardio-vascular diseases, neurological damage, sexual dysfunctions and so on. And the most severe characteristics of alcopops is that their color and taste make them desirable among young consumers, of ages starting at 12 (Mossman, 2008). The most common means of battling binge drinking is that of increasing its costs through the introduction of taxes, limiting the number of alcoholic beverage retailers, strengthening of the legislation and punishments for underage drinking and driving while under the influence of alcohol or the offering of psychological support for alcohol misuse (Centers for Disease Control and Prevention, 2010).

In order to decrease the negative impacts of binge drinking, the authorities have decided to implement an additional tax on alcopops, with the direct intent of curbing binge drinking among the young population. The effectiveness of the tax is however questionable. Such a tax was implemented in Australia for instance, but its results were officially classified as "unclear." The Australian government had increased the excise tax to 70 per cent with the stated intent of reducing the consumption of ready to drink beverages (RTD) among the younger population. The primary scope was that of stimulating the health of the younger population, while the side effect would be that of gaining $2 billion. The government raised $3.1 billion, but no modifications were observed in terms of consumption. The report of the Australian Institute of Health and Welfare indicated the absence of a link between the… READ MORE

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