Question

Background Information: Alcohol related harm (including health effects on the drinkers, and hospital admissions - largely of women due to domestic violence) has long been a problem in the Northern Territory (NT). Previous attempts to address this issue in the NT have included bans on sales of wine and fortified wine in casks and large bottles in 2006, and removing the cheapest forms of alcohol (bulk wine and bulk fortified wine) from the market. A study into the effectiveness of these policies estimated they increased the wholesale price of a standard drink from $0.80 to $1.10. While some people turned to other types of alcohol such as more expensive full strength beer, the study claimed that the decline in cheap alcohol more than offset this, resulting in an overall reduction in alcohol consumption from around 24 standard drinks for every person aged 15 years and over per week, to around 20 standard drinks per week. Alcohol related harm decreased significantly as a result of this reduction in alcohol consumption, and the study concluded: “while the causes of family and community violence are complex, bans on cheap alcohol are especially effective in reducing the number of Aboriginal

Questions:

A) Use the numbers given above to calculate the price elasticity of demand for a standard drink in the Northern Territory for the original price increase, showing your workings. Interpret your answer; does your answer indicate that demand for a standard drink in the NT is elastic or inelastic? Explain what this means with respect to the responsiveness of drinkers to price increases, and suggest a reason (or reasons) for this level of elasticity. In October 2018 the Northern Territory government decided to put a price floor of $1.30 on a standard drink.

B) Will a price floor have a greater or smaller effect on the quantity of standard drinks consumed in the NT compared to if demand was more elastic than you found in answer to part (A)? Explain your answer.

C) Suggest an alternative policy that could result in a similar reduction of alcohol consumption. Explain your answer.

Answer 1

a)

In 2006, the drink prices have risen from $0.80 to $1.10.
Quantity of the alcohol has decreased from 24 standards to the 20 standards

Price elasticity is referred to as the % Change in Quantity Demanded / % Change in Price.
Price elasticity is referred to as the economic measure of the change in the quantity demanded or purchased for the given product in relation to its price change

So the price elasticity is the 24-20/20=1/5=.2
1.10-.80/.80= .375

=.533

It means that when a small change in the price of a product causes a major change in its demand, and it is described to be a perfectly elastic demand. So here, the demand is elastic, with a slight increase in prices the quantity has decreased.

It also means, responsiveness of drinkers to price increases, would decrease with the quantity and would be replaced with better alternatves.

b) If the price floor is placed, which would mean that the or limit on how low a price can be charged for a product, good, commodity, or service.
So if it is 1.30 it would further cause a reduction in demand and it would make less supply of the product, which can be replaced.
The demand is more elastic as
Price elasticity is referred to as the = % Change in Quantity Demanded / % Change in Price.

So the price elasticity is the 24-20/20=1/5=.2
1.30-.80/.80= .625
Answer is .32

c ) Alternative policy to reduce the Alcohol consumption is to place taxing, due to the rise in the taxes, it would cause the rise in the prices of the Alcohol(as the producers would pass it to the consumers) would lead to falling in the demand of the alcohol further. this increased revenue incurred through the government taxing can be used to educate the people and also for the other purposes.