Question

'an inside look' article page 118-119 chapter 4, essentials of economics 4th edition, Thinking critically question

1.The article implies that the demand for alcopops is price elastic due to the availability of substitutes, such as alcoholic cider. Can we infer that the demand for all alcoholic drinks is also price elastic? Explain.
2.Given your response to question 1, do you think that taxing the sales of alcoholic drinks is an effective policy to reduce alcohol abuse? Explain why or why not.

Answer 1

1.

We cannot infer that all alcoholic drink is price elastic in nature, because all alcoholic drinks do not have substitutes present in the market. Further, some of the alcoholic drinks develop habits to consume it and hence, it reduces the elasticity of the product. In this case, the elasticity of the product decreases and consumers become less price sensitive and they will buy it to consume at any price. Hence, one alcopop product being price elastic cannot infer the same about all the alcoholic drinks.

2.

Putting taxes on alcoholic drink sale is an effective policy, but to the limited extent, if the government wants to reduce the abuse and increase the social welfare. Taxes can only limit the consumption up to a certain level, but it will not prevent the people from consuming it. To bring social welfare and prevent abuse, the government should spread awareness and make a ban regarding the sale of alcoholic product to people below the certain age such as below 18 years or 16 years. It will help reduce the abuse and increase welfare part.