The impact of excise taxes on demand for alcohol

The imposition of the high excise taxes can lead in the lowering of the demand and it may have a very minimal effect in case of the goods like alcohol as the demand in such cases is price inelastic. Fundamentally, those individuals that have an addiction towards alcohol cannot stop themselves from purchasing the goods even though the prices rise up. The reason being there is no availability of any close substitutes for the same products. The alcoholic beverages are goods with demerits and hence, there might be an underestimation of the entire costs for the smoking by the individuals (Rios et al., 2013). Therefore, the people consuming alcohol and those addicted towards such products may pay no attention towards the damages and deterioration caused by the products to the health of the people (Grossman et al., 2013). Hence, the same can be considered as the reason of trying to stop the individuals from the consumption of such harmful goods.   

Additionally, there are various amounts of the negative externalities related to the consumption of the products of alcohol and based on such goods. The consumption of the goods like alcohol leads to the increment in the crime rates and the increase in the rates of the diseases and accidents along with many others accidents. Thus, the cost of the alcohol consumption is relatively greater than the definite amount of costs (Kirzner, 2015). In the given case, if the entire social cost is higher than the actual prices then the entire efficiency can be increased by making the individuals pay for the real social prices.    

As described in the below diagram, the preliminary orders or demand is represented by D and the original availability or supply is characterized by S where the balanced cost and capacity is P1 and Q1 correspondingly. On the other hand, with the obligation of the taxes, there has been a reduction or shift of the supply from S to S1 (S + tax). The price rises from P1 to P2 due to burden of taxes and the amount demanded declines from Q1 to Q2. The demand being very inelastic, the larger augmentation in the charges lead to a reasonably lesser quantity of drop in the amount of demanded quantity. The diagram has a reflection of the fact that the obligation of taxes lead in the shifting of the curve of supply from S to S1(S + tax) thus, leading to a turning down in the requirement.

Negative externalities associated with alcohol consumption

Nevertheless, an additional advantage of escalating the excise duties by the authorities of the government on products of alcohols is that it shows the way to the amplified tax proceeds. This can fundamentally facilitate the relevant government of the state to expend on the elevated quantity of funds on the complete healthcare and campaigns that helps in inspiring individuals to maintain distance from alcohol. Else, this can lead towards the decrement in the tax rates like in cases of VAT (Gao et al., 2013). On the other hand, the influence alongside the burden of the tax on these products is that there is inelasticity in the prices for this kind of goods. Consequently, the increase in value for imposition of taxes can merely result in an extremely immaterial drop in the demand for the goods.

The authority of the government can suggest a least amount cost for a specific element of alcohol. This lowest price is principally aimed at prevention of the trading of alcohol at an extremely cheap rate by diverse stores and markets. The advanced prices can result towards the discouragement in drinking that would further lend a hand in the improvement of the wellbeing and also in forcing of the individuals to compensate accurate price of alcohol (Enthoven, 2014). In the other case, there are arguments by the economists that the same can be considered to be unreasonable. There can be an insertion that the regressive cost can result towards hurting the living standards of the specific individuals as a whole, those living on lower revenue. On the other hand, the overconsumption of the products of alcohol can result into a wide variety of communal troubles that comprises of an amplified occurrence of offences, crimes and augmented frequencies of premature deaths, accidents, and disorders in liver, various diseases in heart and lungs (Holmes et al., 2014).

The illustration below describes that the social cost of utilization of the products of alcohol is superior to the entire private cost. The setting up of the lowest price at an advanced stage that is above P1 makes individuals compensate the social cost of utilization of alcohol products. Consequently, the same results in the decrease in the amount of utilization from Q1 to Q. Therefore, it can be concluded that the advanced minimum costs laid down by the administration can be well thought-out to be a significant aspect in managing with higher prices of consumption of the alcohol (Fabiansson & Fabiansson, 2016). Subsequently, this depresses persons from overconsumption of the alcohol products. 

Benefits of higher alcohol taxes

It demonstrates the financial side at the back of the set up of the least amount of costs for the alcoholic products. In case of normal state of affairs, there is an equalisation of the demand with the supply, and at the price P and at quantity Q that stands in the equilibrium. Fundamentally, a model considering the normal demand and supply emphasizes on a point that a minimal cost that is situated over the price of equilibrium can guide to a state of excess. The excess or surplus in such case means that the supply exceeds the demand. Nevertheless, in cases of the pricing of alcohol, such situation will not arise, the reason being the inelastic behaviour of both the supply and demand of the products (McKnight-Eily et al., 2014). In such scenario, the traders of alcohol will consider raising the prices and the same will have an association with the decline of quantity. As a consequence, it will lead to substantial decline in various problems associated with alcohol.

However, there are numerous behaviours to turn aside problems associated with alcohol, but setting up higher minimum cost for alcohol can absolutely put forth assured pressure on decrease of the entire demand of the goods.  On the other hand, this trouble of consumption of alcohol cannot be completely condensed by way of deciding the greater minimum costs due to the inelastic nature (Kotler et al., 2015). The same implies that that alteration is price directs to very minute transformation in the whole change of percentage in demand as there is inelasticity in the prices of the products. 

The Firms that have a nature of being monopolistic competitive do not carry on their functions at their least average total cost in view of the fact that, they have an operation with an excessive capacity (Bertoletti & Etro, 2016). 

The above diagram illustrates that a producer would result in the loss of money in cases of producing additional products to attain a competency of dividing or productive nature. In case where, the marginal cost of chart gets higher further than the Marginal revenue of $200, the firm will have an incurrence of a larger price and it might result in receiving an additional amount of revenues. This is the cause where the producer will take full advantage of their revenue by manufacturing of the capacity where the MR i.e. the marginal revenue is equivalent to the MC i.e. the marginal cost and price charged at the price of $200.   

Minimum pricing for alcohol products

The structure of market named as Oligopoly is completely dissimilar from the various other types of marketplace. The features of the Oligopoly are described below:

Dependency: One of the leading descriptions of the market structure of Oligopoly is the dependency in the various firms in the procedure of the decision-making. For example, if a considerate number of firms and having a good size forms the constituent of the business and one among all the firms inaugurates the promotions for advertisement on a larger scale or creates attractive designs for an innovative product that takes into custody the market, there will be a provoking of a phase of countermoves among the competitors. Therefore, it is understood that the firms have a close dependence over each other (Faia, 2012).

Advertisement: Underneath the structure of the oligopoly market, a chief transformation in the strategy of the firm is mainly probable to generate an instant result on the other markets that have an operation among the industry. The most powerful form of instrument in the oligopolistic market is advertising. A firm functioning under such structure of an oligopoly market can have a beginning of an antagonistic advertising campaign having an intention of acquiring a noteworthy segment of the marketplace.

Firms Behaviour: Underneath the structure of the oligopoly market, the most important aspects among all comprise of the group’s behaviour. Without considering with reference to the number of grouping, every firm has the knowledge of the activities of other firms and will have a pressure on the assembly.

Competitive forces: In the structure of the oligopoly market, there are minimal amount of traders and a single move completed by a seller instantaneously generates an impact on the enemies.

Barriers to entry: In view of the fact that, there is an enthusiastic competition in the industry of oligopoly, there is no barrier of getting an entry or exiting out from the firm.

The Banks forming part of the oligopolistic market include the NAB, Westpac and common wealth banks for ensuring the constancy of the system of banking in Australia (Dubovik & Janssen, 2012). 

The features of Monopolistic competition are described below:

Greater amount of Sellers: There are greater amount of organizations and firms that consider the trading of directly associated supplies; on the other hand, they are not standardized in nature. Every organization acts in an independent manner having a limited amount of shares in market and persons normally have restricted power more than the marketplace.

Oligopoly market structure

Differentiation of Products: Every organization has the position of putting into effect a definite measure of domination through the consideration of differentiation in products. There are closely related products among the firms but however, they cannot have a perfect substitution with respect to the other firms.

Price of Sale: In cases of a monopolistic competition, the products and services are distinguished and the dissimilarity is being made known to the consumers through the costs of sales. Therefore, the cost of selling shapes the significant element under the competition of monopoly (Goettler & Gordon, 2014).

The organizations such as Woolworth and Coles are looked upon as firms having a monopolistic competency in the economy of Australia. The above companies have a share of about 60% of the total share in the market (Horstmann et al., 2016). 

The structure of Duopoly is defined as the form of marketplace where two organizations has a possession of a governing power above the market. The requisite elements of a duopoly structure consist of:

1. Only two firms are in existence
2. Sovereignty (Doganoglu & Grzybowski, 2013)  

From the market stated above and the given demand curve perceived effectively it is known that if an organization enters into the market of duopoly, the firm will have a production at the level of output of Firm 1 described above. The reason is because the production done at this level results in the equal marginal revenue and cost. The same will facilitate the organization to charge price at the x axis given above in the figure that is measured as the price of monopoly. When another firm will have an entry into the market, it will make the most of their proceeds and ask for greater and higher prices. 

The illustration helps in explaining and describing that the concern has a production of products at T and the price gets higher up to the level of P. The same will have a representation that it constitutes a perfect point for the firms mutually and the combined construction by the firms has a representation of a monopoly yield (Jen & Sarmah, 2014). 

References

Bertoletti, P., & Etro, F. (2016). Monopolistic competition when income matters. The Economic Journal.

Doganoglu, T., & Grzybowski, L. (2013). Dynamic duopoly competition with switching costs and network externalities. Review of Network Economics, 12(1), 1-25.

Dubovik, A., & Janssen, M. C. (2012). Oligopolistic competition in price and quality. Games and Economic Behavior, 75(1), 120-138.

Enthoven, A. C. (2014). Theory and practice of managed competition in health care finance. Elsevier.

Fabiansson, C., & Fabiansson, S. (2016). Food and the Risk Society: The Power of Risk Perception. Routledge.

Faia, E. (2012). Oligopolistic competition and optimal monetary policy. Journal of Economic Dynamics and Control, 36(11), 1760-1774.

Gao, Z., Yu, X., & Lee, J. Y. (2013). Consumer demand for diet quality: evidence from the healthy eating index. Australian Journal of Agricultural and Resource Economics, 57(3), 301-319.

Goettler, R. L., & Gordon, B. R. (2014). Competition and product innovation in dynamic oligopoly. Quantitative Marketing and Economics, 12(1), 1-42.

Grossman, M., Sindelar, J. L., Mullahy, J., & Anderson, R. T. (2013). Policy Watch; Alcohol and Cigarette Taxes.

Holmes, J., Meng, Y., Meier, P. S., Brennan, A., Angus, C., Campbell-Burton, A., … & Purshouse, R. C. (2014). Effects of minimum unit pricing for alcohol on different income and socioeconomic groups: a modelling study. The Lancet, 383(9929), 1655-1664.

Horstmann, N., Kraemer, J., & Schnurr, D. (2016). Oligopoly competition in continuous time.

Jena, S. K., & Sarmah, S. P. (2014). Price competition and co-operation in a duopoly closed-loop supply chain. International Journal of Production Economics, 156, 346-360.

Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.

Kotler, P., Keller, K. L., Manceau, D., & Hémonnet-Goujot, A. (2015). Marketing management (Vol. 14). Englewood Cliffs, NJ: Prentice Hall.

McKnight-Eily, L. R., Liu, Y., Brewer, R. D., Kanny, D., Lu, H., Denny, C. H., … & Collins, J. (2014). Vital signs: communication between health professionals and their patients about alcohol use—44 states and the District of Columbia, 2011. MMWR Morb Mortal Wkly Rep, 63(1), 16-22.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.