In: Economics
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 women subjected to assault.”
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.