Effects Of Excise Duty And Minimum Price On Alcohol Consumption

Assume the government wishes to reduce alcohol consumption by considering a higher excise tax on alcohol products. Collect information on estimates for the price elasticity of demand for alcohol products. Based on these elasticity estimates illustrate using a demand/supply diagram(s) who bears the burden of the higher excise tax, consumers or producers.

As an alternative for reducing alcohol consumption assume the government is also considering the imposition of a minimum price on alcohol products. Using a demand/supply diagram illustrate the consequences of imposing a minimum price on alcohol for the consumption of alcohol products.

Provide comment on the relative merits of increasing excise taxes compared to imposing a minimum price on alcohol products for reducing alcohol consumption.

a) Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer’s tables in $200 per table. Under conditions of monopolistic competition, will the long-run price of a table be above $200, equal to $200 or less than $200. Explain your answer.

b) What are of the characteristics of an oligopolistic market? Give three examples of industries with oligopolistic firms in Australia. Justify your examples by relating them to the characteristics of oligopolistic firms.

c) What are the characteristics of a monopolistically competitive market? Give three examples of industries with monopolistically competitive firms in Australia. Justify your examples by relating them to the characteristics of monopolistically competitive firms.

d) Assume that two firms make up a natural duopoly. What are the conditions which may make this occur? Sketch the market demand curve and cost curves that describe the situation in this market and that prevent other firms from entering.

Price elasticity of alcoholic products

The report depicts about the different markets in same industry which is oligopolistic competition, monopolistic competition and duopoly competition. It explains the changes in the demand of a product due to some change in the price structure. This market offers different results due to price changes (Hussain, 2010).

Price elasticity creates a relationship between the price and demand of a specific product. It concludes a relationship on quantitative basis between the demand and price of services and product by influential the % of changes in the demand due to even 1% change in the total price (Arnold, 2008).

Price elasticity of demand could be calculated by formative some change in the demand of the customer due to some change in the product or service price. It could be calculated by following the below formula:

The excise duty is a kind of tax that is paid by the manufacturers or producers at the time manufacturing the products. Excise duty is indirect tax whose burden could be shifted to customer or another party. In concern of excise duty, primarily the taxes is paid by the producers or manufacturers but after the transformation of the goods into finished goods, the payment is  reimbursed by the customers for the services or products (Boyes & Melvin, 2012).

The main reason in the wake of imposing the tax by the government to the public is generation of revenues and deducting the demand and supply of that specific product or services.

In this case study, the government has taken a decision to enhance the % of excise duty so that the supply of alcohol could be reduced in the market. The main purpose of government behind is to increase the % of excise duty to deduct the total demand of alcohol and alcoholic products in the marketplace (Free, 2010).

Due to increment in the % of excise duty, the manufacturer would be required to pay out higher taxes and excise duty which would result into decrement in the total profit margin of manufacturers. Hence, for making more profits the manufacturer would be required to enhance the prices which would reduce the total demand of the alcohol and alcoholic products according to rules of price elasticity of demand. Thus it could be said that the excise duty’s final burden would be on consumers. Therefore it could be said that increment in excise duty would go ahead to make a decrement in the demand of alcohol and alcoholic products (Gottheil, 2014).

In price elasticity of demand, the analysis report has depicted that there demands are of 2 types, i.e. elastic and inelastic demand. The durable products falls in the group of elastic demand, whereas some addicted products such as drugs, liquor, alcohol falls in the group of inelastic demand due to the addiction of the consumer. Thus it could be understand by the following example (Morgan, 2014).

For example an alcohol product whose price is $100 earlier has been raise to $200 due to the excise duty of 100% by the government.

Bearing of burden of excise duty

In the above situation, it could be said that due to consumer addiction, there would be not much difference between the past and current demand. This is due to the inelastic demand of addicted goods. The change in price could also not make an impact over the demand of such products.

This figure depicts the demand curve with the changes in the price. It depicts that when the price was $8 then the demand of that particular product was 200 but with the increment in price, the demand has been fallen.

Price elasticity of demand= Q/Q      -  2/10 (-)0.2

P/P             100/100

The price elasticity is (-) 0.2, this means that it is elastic demand.

The main purpose of government behind enhancing the price of alcohol is to make some changes in the society and stop the health problems in the nation. Elasticity of demand theory depict that the consumer is rational in nature and he or she would buy the cheap product. Thus according to this theory and assumption, it could be said that by enhancing the price of alcohol and alcoholic products, the final price of the alcoholic product would be raised that would be quite less attractive to consumers. However in such condition, the alcoholic product would fall in inelastic demand thus the decrement in demand will not take place but would reduce to some coverage (Sivagnanam, 2010).

It has been found by the observation and study that increment in the price of the alcoholic products would not make an impact over the demand of product. This would result into decrement in demand but increment in supply due to that the price of product would be reduced and would be sold at fewer rates (Vogelsang, 2013).

Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer’s tables in $200   per table. Under conditions of monopolistic competition, will the long-run price of a table be above $200, equal to $200 or less than $200

In above case of production in long run, all the production factors could be considered as variable. In long run, all the companies are free to enter or exit from the marketplace. In case of average cost in long run, it is the depiction of average total cost in the company. It symbolizes the company’s total cost for manufacturing the essential quantity. Average cost in long run is the sum of all the company’s short run average cost.

In monopolistic competition, the firm is price maker. Firm is able to charge different prices from customers. In monopolistic marketplace, the firms are free to enter and exit as the probability of profit is more which would attract the new companies while the loss probability would lead the companies to exit from the market. This would deactivate the affect of loss or profit of the company.

By concerning the above case, in initial period, the firm could charge from customers lower than the $200 because of competitive advantage and economies of scale. But due to some increment in the manufacture, the profit margin cost would increase and due to it the average cost in long run would get affected. This would result into increment in the average cost of long run. Thus the firm is advised to enhance the price.  Thus it could be said that in a long term period, the table manufacturing company will be required to increase the price from $200 to rally the enhancement in the average cost in long run.

Increment in the price of alcohol and alcoholic products

Oligopolistic market is the market where sellers are few and buyers are more. In such marketplace, there are few numbers of retailers which are selling uniform products. The main attribute of this market is that a cut throat competition could be found in this marketplace among many players. The cut throat competition goes ahead to increment in the completion which benefit is totally taken by the buyers.

In oligopolistic market the firms charges almost same prices by optimize theist decision. In this marketplace there are few restrictions on entering the new firms and the reason behind this is that the existing firms lay a central position in the marketplace. This market is of two type i.e. perfect and imperfect oligopoly. Perfect oligopoly is when the existing firms  in the marketplace sells homogeneous products while if the firms are selling heterogeneous product than it would be known as imperfect oligopoly. In this case of perfect oligopoly the products require very less innovation such as Iron, Steel, Zinc and Copper, while some examples of imperfect oligopoly is Cosmetics, Soaps, and Detergents (Chamberlin, 2015).

By applying these characteristics in the Australian market, it has been analyzed that Woolworths and Wesfarmers falls in the oligopoly market category. The main reason behind talking these firms into oligopoly marketplace is that both of these produce same products and both of these lays a leading position in the market. More, in the case of operating system, the companies such as IOS and Microsoft could be defined as oligopolistic companies as both of these posses a great share of total market (Takahashi, Muromachi & Nakaoka, 2012).

Monopolistic market is the market where it contains a great number of buyers and sellers. It places freedom to the firms to enter and exit from the market. The products offered by the firms lay some difference and this lead some changes in the prices. Due to existence of few differences market players faces tough competition (Paulsen, 2013).

There is no barrier for the companies to enter and exit from the marketplace. The firms which are trading in the market are price makers. The benefits received by the companies due to charge a different price got deactivate in long run, thus the companies in such market groups lower the degree to the market. As in short run, the profits could be enjoyed by few players, at the same time in long run; it will attract many players in market which would lead some reduction in margins of the companies. More, it is tacit in this market that customer and suppliers have full knowledge. To make a compete with market competition, the companies need to spend lot money in promoting so the customers could know the key differences of companies (Nikaido, 2015).

In monopolistic market, garments industry, food industry, consumer durables like smart phones, television, refrigerator etc are the few examples of this marketplace. In food industry, Krispy kreme, Pizza hut, Donut king etc are main players while in case of phones, ALDI, Telstra, Vodafone etc are main players. These could be considered as monopolistic market companies because they offer same product with some differences (Markovits, 2014).

It is a part of oligopoly market. In oligopoly, few sellers and lot of buyers are in market. While in duopoly only two sellers and large number of firms are in the market. It does not take place due to globalization now days, earlier it used to exist by a grouping of private and public  sector (Xu, Hajiyev, Nickel & Gen, 2016).

Two sellers are only existed in this market that has a central position in the market. This puts restriction in entry or exit of the sellers. By considering the above characteristics in the market of Australia, it has been found that a close completion is there between the wesfarmers and Woolworth ltd, both of these companies has leading position in the market that restricts other companies from entering into the market. However it is considered as imaginary market currently (Jong & Shepherd, 2013).

The demand curve is complex in duopoly market, the main reason behind it is that the demand could not only influences by own prices but it also get change due to other company. This would results into positive relation as when a company would increase the price the demand of other company product would also increase and vice versa (Hirschey, 2008).

Conclusion

By analyzing and considering the study it could be said that market with different nature has different supposition about the sellers and consumers in the marketplace that leads some change in the result. Out of the market discussed above, the monopolistic market is analyzed common due to many of companies offering same products with some differences.

References

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Boyes, W & Melvin, M,. (2012) Economics, Cengage learning, USA

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Xu, J. Hajiyev, A. Nickel, S & Gen, M,. (2016) Proceedings of the tenth international conference on management science and engineering management, Springer, London