Thursday, 10 November 2011


Evaluate possible economic policies other than increasing the age limit that a government might use to significantly reduce the consumption of alcoholic drinks

Market failure occurs when market imperfections lead to an inefficient allocation of resources. In order to reduce this inefficiency governments intervene. There are several economic policies that can lead to a reduction of the consumption of alcoholic drinks, e.g. increasing the age limit. In this essay I will evaluate different ways of approaching this problem and limiting the negative externalities, i.e. costs paid by third parties.

First of all, a government could put a higher tax on alcohol products to increase their prices and, consequently, discourage people to buy them. As drawn in the diagram below, an increase in indirect taxation would cause the supply curve to shift to the left and, therefore, pushing up the price of a product.

Taxes, however, are difficult to implement efficiently. To cause a significant reduction of the alcohol consumption the tax level has to be significantly higher. For example, a 1% change in tax would not have a big impact on alcohol consumption. Moreover, if a change in taxes would be high, it could lead to an increase in alcohol import from other countries, or black-market. The price elasticity of demand, i.e. the responsiveness of demand to changes in the price of a product, is another factor affecting the results of taxation. If demand for alcohol is inelastic, higher taxes will not reduce the demand significantly.

Secondly, a government could implement regulations on the alcohol consumption. For example, it could ban public drinking and/or limit the times of alcohol sale (e.g. people could buy alcohol only in the afternoon). This would lead to lower consumption of alcohol only if it would be followed by everybody and guarded by the police. It could also encourage people to go to pubs and bars instead of drinking in public places but would not decrease the consumption significantly.

Moreover, a government could prepare information campaigns and events on the negative externalities of drinking, such as higher criminality and unemployment.

It could educate people about the possible negative results of drinking and encourage them to limit their alcohol consumption. It would also lead to limiting the imperfect information problem. People should be also aware that overconsuming alcohol which a demerit good, i.e. a good which has been found through the political process to be socially undesirable, causes harm to them (e.g. liver cancer, addiction). These actions could result in significant changes, especially in the long-term and, therefore it is difficult to assess their helpfulness in a short period of time. Educating the public takes a long time and has to last for many years.

Alcohol consumption is often considered as a part of tradition and culture and therefore it will be difficult to limit it. However, from the evidence above, we can see that the government has many possible ways of intervention. These options, should not be considered only in a short-term and as substitutes but rather complement.

That's what I think, 


Comment on the effectiveness of one policy which could be used by a government to reduce income inequality.

One policy that could be used by a government to reduce income inequality is progressive taxation. People with higher incomes would have to pay a higher percentage of their income in taxes and low-income people would have to pay less. On one hand, it could lead to a reduction in income inequalities among people but, on the other hand, its effectiveness could be limited. First of all, high-income people would have an incentive to stop working (or work less) or flee the country. It could also encourage them to avoid paying taxes and keep their money in banks from abroad. Secondly, it depend on the difference between two levels of taxation, because if it is significantly low it will not have a big impact on reducing income inequalities.

Other factors to consider are:
1. wider macroeconomic implications (e.g. discouraging inward investment, fall in tax revenue, therefore, reducing the funds available for welfare benefits)
2. tax as an instrument excludes those who do not pay income tax (students, unemployed, pensioners) who, arguably suffer most from inequality
3. criticism of a fiscal policy as a blunt instrument
4. how progressive should the tax be, data from other countries?