Question

Please do it by type not write.

1. Consider the market for buying and selling alcohol in Moscow. Suppose that, after a series of troubling incidents, the city decides it needs to protect citizens by discouraging alcohol consumption. Using a simple sketch of demand, show how each of the following policies would be expected to impact the behavior of buyers:

a. The city buys several billboards showing the devastating results of drunkdriving accidents.

b. The city significantly increases the tax rate on alcohol.

Answer 1

Consider the alcohol market, here the city decide to discourage the alcohol consumption and there are 2 possible policies that they can use for that.

a).

Consider the following fig here the “D” be the demand for “Alcohol” and “S” be the supply of “Alcohol” and “E1” be the equilibrium “P” and “Q1” be the equilibrium quantity demanded.

Now, “The city buys several billboards showing the devastating results of drunk driving accidents” => as a result of that the demand for “Alcohol” will decreases at the given “P”, => “D” will shift to “D2”. So, the new equilibrium will established at “E2” the intersection of “D2” and “S”. So, at this new equilibrium the “P=P2 < P1” and “Q=Q2 < Q1”. So we can see that both the “Price” and the “Quantity demanded” will fall down compared to the initial equilibrium “E1”.

b).

Consider the following fig for "tax" on "Alcohol".

Now, assume the government will impose a significantly high tax on the buyers, which leads to increase in the “P” to “P2”, => leads to consumer will discourage with the tax and they reduce the quantity demanded to “Q2”. So, we can see that because of the tax the here “P” will increase to “P2 > P1” and the quantity demanded will reduced to “Q2 < Q1”.

So, if we compare both the cases we can see that in both the cases the quantity demanded will fall, but the in the 1st case "buyer" reduced their demand given the price but in the 2nd the "tax" increase the "P" that induce the buyer to reduce quantity demanded.