Discuss economic arguments for and against imposing substantially

Discuss economic arguments for and against imposing substantially

higher taxes on sale of alcohol.

Governments interfere in markets and their working with the primary

purpose of provision of welfare to people and preventing market

failure.

There are many methods of intervention such as

- taxes and subsidies

- buffer stocks

- applying maximum and minimum prices

- provision of public goods and services

- provision of education and training

- legislation and market reforms

Applying taxes has two purposes: to generate revenue for the

government and to discourage consumption and output of certain goods,

usually demerit goods.

Demerit goods are those goods that are usually over consumed by in a

market system, and have social costs exceeding social benefit due to

high negative externalities. They contrast merit goods which are

desirable for the welfare of society, as positive externalities exceed

negative externalities.

Taxes out on goods such as alcohol are considered indirect taxes.

Depending upon the price elasticity of a good, and its demand and

market price, government places either

- specific taxes that are of a specific number, e.g. 10 dirhams on

every bottle of beer

- ad valorem taxes that add a percentage of the market price onto

taxes e.g. 5% of price of beer

A government must analyze the effects of taxing, or increasing

taxation on a good, whether or not the taxation satisfies the goals.

The Social costs of alcohol involve the cost of production, cost of

purchase and negative externalities such as alcohol poisoning and

drunken driving deaths and violence.

The social benefits are the profit made by producers, the utility

gained by consumers and externalities such as prevention of heart

diseases.

The imposing of substantially higher taxes on the sale of alcohol may

be good in two ways:

Firstly, alcohol is regarded as a habit forming good. Hence it may be

assumed that either it disobeys the law of demand (quantity demanded

of a good is inversely proportional to change in price, all other

factors remaining constant), or it is price inelastic (a percentage

change in price causes a smaller percentage change in quantity

demanded). Although imposition of taxes will increase the market price

of alcohol, the change in demand would be substantially lower.

Therefore the government would gain revenue, which it may use for

provision of welfare.

Secondly, alcohol is a demerit good. It has private benefits as an

industry, and it provides utility and satisfaction to consumers. Its

positive externalities include reducing coronary diseases, and

providing amusement to others in social events. However, its negative

externalities include addiction, drunken driving accidents and fights

which result in property damage, and provide a burden to society. Its

positive externality of preventing coronary diseases arises only from