Question

V. State whether you agree or disagree with the following statements and briefly explain why. Please draw graphs to explain your answer, where appropriate.

In some states, the state government owns and operates the liquor stores. The governor of one of these states made the following statement.

"An increase in the price we charge for liquor would fight the twin evils of alcoholism and the state budget deficit. Even a small price increase would greatly decrease the use of alcohol and would increase the revenue going to the state."  

Answer 1

Yes, I agree with the statement that when a higher price is charged for alcohol then it can fight the twin evils of alcoholism and the state budget deficit. Since the incomes of the people are not changing and if the price of alcohol increases then surely people can/will buy less alcohol.

For the first evil of alcoholism, it is true that people spend a lot of money on alcohol consumption which is not good for health. So for this type of good government increases price so that its consumption will decrease and people will drink less alcohol. It can be seen from simple demand and supply curve graph that when price increases then the demand decreases.

The second benefit of price increase is that it will increase state governments revenue. Since government earns some revenue and spend them in the state for different programmes but this revenue is not enough to finance those programmes and hence the state government's budget is mostly deficit. So the increase in price of alcohol will earn more revenue for government and hence it can improve the budget deficit.

So in this way increase in price of alcohol will have dual benefit.