Question

Suppose the majority of the residents of Birraland live close to the border and have access to beer at a lower price either in another province or in a neighbouring country. What do you expect to occur? What does this imply about the ability of the local government of Birraland to independently set their beer pricing policy? Which jurisdiction is likely to be more problematic, other provinces or the neighbouring country?

Answer 1

Suppose the majority of the residents of Birraland live close to the border and have access to beer at a lower price either in another province or in a neighbouring country.

In the given situation it is expected that if the price of the beer produced locally is higher, than the demand for it will be very less because the residents have the option for the cheaper one. This means that the price elasticity of demand for local beer will be higher i.e. more elastic.

This elastic demand for the local beer decreases the ability of the local government of Birraland to independently set their beer pricing policy. This is because since the demand is elastic so the producers or government will have less control over the price and the consumers will have higher control. Thus if the government tries to increase price or put a tax on beer the demand will fall sharply and hence both producers revenue/profit and government tax revenue will fall.

The jurisdiction of the neighbouring country is likely to be more problematic, because if there is problem between the provinces within the country it can be solved with the intervention of National government or a two party talk. But if there is problem between countries it is very difficult to control because even if they formally ban imports people living along the border may get it illigally.