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Consumption Of Alcohol: Economic Growth

  0 Downloads   |   5 Pages 1,210 Words   |   Published Date: 13/10/2017

Question:

Discuss about the Consumption of Alcohol for Economic Growth.
 
 

Answer:

Introduction 

Consumption of alcohol has direct adverse effects on the economic growth because if the citizens of a country consume alcohol, it tends to lead to wastages of the money which indirectly creates several issues in his/her social, financial and biological life. Higher consumption of alcohol leads the individual to involve in the criminal activity which directly enhances the crime rate in the country. Therefore, the government is trying to reduce the consumption of alcohol. In this regards, the government has adopted a technique to minimize the usage of alcohol which involved the tax rate on the use of alcohol. In this paper, the main focus is to analyze whether this technique of alcohol tax is effective or not.

Analysis

As per academic scholars, researchers and World Health Organization (WHO), alcohol tax reduces the per capita consumption of alcohol (Elder et al., 2010). However, this claim needs to be analyzed in light of microeconomic principle.

The figure below shows the shifting of the supply line in the demand-supply diagram after application of the alcohol tax.

Analysis

The alcohol tax is applied on the suppliers of alcohol which indirectly affects the price of the alcohol and then this additional tax amount is passed to the end consumers.

Let S be the initial supply curve which has shifted leftwards and becomes S+tax because of the application of the alcohol tax. As the demand curve is assumed to be constant hence this shifting of the supply curve would lead to increase the price from P to P+ tax. Increase in the price of the alcohol indirectly reduces the consumption of alcohol and hence this technique seems to be effective in nature (Pindyck and Rubinfeld, 2001).

However, in the demand-supply diagram, the imperative phenomena of elasticity of demand cannot be neglected. Hence, this above discussion is not completely true as the entire alcohol tax amount may not be passed to the consumer. Relative elasticity of demand can alter the passage of tax burden as shown below (Nicholson and Snyder, 2011).

Figure 1 shows the case of inelastic demand where a significant increment in the price of alcohol which comes by applying alcohol tax has shifted from P to PT would cause a slight change in the demanded quantity from Q to QT. This change in the quantity is quite minimal and easily adopted by the suppliers. In such situations suppliers easily passed the incremental value (alcohol tax) to the consumers (Krugman & Wells, 2013).

Figure 2 shows the case of elasticity of demand in which slight change in the price of the goods cause huge change in the demanded quantity. In this case, the increment in the price from P to PT   results in high reduction of the quantity demanded and equilibrium quantity shifted from Q to QT.  In such cases the suppliers of alcohol decides to pass very limited amount of the increment tax to the end consumer (Mankiw, 2014).

It can be concluded from the above analysis that this technique of alcohol tax is only effective if the elasticity of demand is considered. However, as the alcohol is considered highly addictive hence, significant addictive consumers fall in the inelastic market which was not much affected by increment in the price. Hence, it is not significant to use alcohol tax in this scenario of inelastic market structure. Thus, alcohol tax needs to be supplemented with other reasonable options stated below (Elders et. al., 2010).

  • To start the health educational, awareness programs among the new generations more specific for youths and new users to resist them to use alcohol.
  • Rehabilitation plans for the addicted peoples to get rid of this problem
  • Requisite counseling campus
  • Regulatory steps for example highly restrictive rules of selling the alcohol
  • Specified age for the consumers

Conclusion

It can be concluded from the above discussion that effectiveness of alcohol tax is dependent on the market structure. Hence, this technique cannot be assumed to be the only way to reduce the usage of alcohol. Therefore, to resolve this menace, additional measure like rehabilitation, requisite campus should also be implemented along with the alcohol tax.

Introduction 

A country can be more efficient than the other country in terms of the production of a specified product or service. This phenomena can be used to enhance the economic trade gains and efficiency if the particular nations itself decides that it would be better if they produced a particular goods or services with maximum efficiency (McConnell, Brue and Flynn, 2014).

To determine the production efficiency of the country, two major types of advantages are used

  • Absolute advantage
  • Comparative advantage

In this paper the main objective is to find the major different between the above two advantages in the backdrop of international trade.

 

Analysis

Absolute advantage concept was first explained by Adam Smith. It stipulates that if the particular foreign nation is efficient to produce a specific good and same can be exported to the host country, then the host country in place of producing the same goods by the help of its own resources, imports the goods at the lower rate from foreign nation. The absolute advantage is measured using the cost of production and the country capable of producing a good at lower cost has this advantage. There are some drawbacks of this theory. For example, it cannot describe the way forward in situations where a country does not exhibit absolute advantage for any good (Dombusch, Fischer and Startz, 2013).

To resolve this issue Ricardo explained the concept of comparative advantage in which the advantage can be calculated with respect to the lower opportunity cost and not by deploying the lower manufacturing cost. Therefore, the particular nation which shows the lower opportunity cost of the goods is considered to have comparative advantage against the other nation (McConnell, Brue and Flynn, 2014).

The following example sheds light on this concept.

The following example sheds light on this concept.

As per absolute advantage, Portugal is the favored nation for both products. However, the opportunity cost of cloth production in terms of wine is lower for England (5/6 units) in comparison with Portugal (9/8 units). Thus, in line with comparative advantage theory, Portugal should produce wine and England cloth and trade with each other for maximum gains (Dombusch, Fischer and Startz, 2013).

Conclusion

It can be concluded from the above analysis that lower the cost of manufacturing would lead absolute advantage and lower the opportunity cost would lead comparative advantage. From the research it found that comparative advantages model is much more flexible as compare to absolute advantage model because it provides the higher efficiency rate and economic gains for the nation from international trade.

 

References

Dombusch, R., Fischer, S. and Startz, R. (2012), Macroeconomics, New York: McGraw Hill Publications
 
Elder, R. W., Lawrence, B., Ferguson, A., Naimi, T. S., Brewer, R. D., Chattopadhyay, S. K., Toomey, T. L., & Fielding, J. E. (2010), The effectiveness of tax policy interventions for reducing excessive alcohol consumption and related harms, American Journal of Preventive Medicine, 38, 217-229.

Krugman, P. and Wells, G. (2013), Microeconomics, London: Worth Publishers

Mankiw, G. (2014), Microeconomics, London: Worth Publishers

McConnell, C., Brue, S. and Flynn, S. (2014), Macroeconomics: Principles, Problems, & Policies, New York: McGraw Hill/Irwin Publications

Nicholson, W. and Snyder, C. (2011), Fundamentals of Microeconomics, New York: Cengage Learning

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