1. You have been employed as an economist to advise the Department of Health and the federal government about the following issue. The minister has argued that raising the tax on alcohol is the most effective way to reduce alcohol abuse in our society. Do you agree or disagree? Explain why or why not.
2. Explain the difference between comparative advantage and absolute advantage.
Alcohol abuse is a significant menace for the society primarily because of the social, economic, financial and health costs related to its consumption. These costs account for billions of dollars which other could be used in a productive manner to provide impetus to economic growth. As a result, the Federal government takes a plethora of measures to discourage the consumption of alcohol. One of the measures in this regard is to increase the price through the usage of taxation. The underlying aim is to determine whether this is the most effective measure to tackle this problem.
As per the WHO, taxation on alcohol represents arguably the most influential strategy for reduction in alcohol control and must be mandatory in nations where alcohol consumption is excessively high. Further, various scientific studies in this regard, also provide evidence that taxation is an effective measure in dealing with the menace of alcohol abuse (Elder et al., 2010). The impact of imposition of indirect tax on alcohol is represented in the diagram below.
Due to levying of the alcohol tax, there would be a shift in the supply curve as shown above. Apparently, this would lead to a lowering of equilibrium quantity while the equilibrium price would increase and hence the problem of alcohol abuse can be addressed. However, the above analysis is based on a naïve assumption that the complete taxation burden would be borne by the consumers and hence reflected in the selling price (Mankiw, 2014). However, this may not be true as the distribution of the taxation burden between the buyer and seller is essentially determined by the underlying elasticity of demand of the alcohol type (Fullerton & Metcalf, 2002). This is shown below.
It is apparent from the above graphs that in case of inelastic demand, the majority of the taxation burden is borne by the buyer while in case of demand being elastic, a higher proportion of tax burden is borne by the seller. Further, the impact of taxation on curbing the demand also is determined by the underlying elasticity of demand (Krugman & Wells, 2013).
The taxes on alcohol are of indirect nature and hence paid by manufacturers or importers of alcohol. These may be passed on to the various stakeholders in the value chain including the consumers in varying proportion. There is lack of clarity amongst the researchers with regards to the actual extent of this burden that is borne by the consumers. Further, it has been empirically observed that the alcohol purchased from licensed premises are more likely to pass the burden of tax to customers, On the other hand, large retail chains and supermarkets tend to absorb a larger portion of the tax and tend to adhere to cross subsidisation of alcohol from profits generated on food sales (Rabinovich et al., 2009). Thus, it is apparent from the above discussion that the price offered to the consumers would be subject to differential level of taxation based on location, choice of alcoholic drink and place of drinking.
As a result, it is advisable to supplement the alcohol taxes with community based awareness programs especially for the youth along with rehabilitation programs for the addicted and vulnerable population. Besides, age and promotions regulations must be strictly enforced to minimise alcohol consumption.
From the above discussion, it may be concluded that even though taxation is an effective measure for addressing the alcohol abuse but still it must not be used in isolation. Rather, it should be used along with other measures which aim to reduce the incidence of alcohol abuse and seek to provide rehabilitation to those addicted to alcohol.
One of the key central tenets of various trade theories is the presence of advantage by a particular nation with regards to cost and other endowments that makes trade lucrative. In this regard, there are two concepts namely comparative advantage and absolute advantage which drive the allocation of limited resources between nations in a manner that is beneficial for both of them (Koutsoyiannis, 2013). The underlying aim is to highlight the difference between absolute advantage and comparative advantage in the backdrop of international trade.
The concept of absolute advantage in the context of international trade was coined by Adam Smith who opined that if any particular foreign nation can produce and supply a particular good at a lower cost as compared to the native cost, then it is concluded that the foreign nation has an absolute advantage with regards to that particular good. As a result, it makes sense to import the given good from foreign nation and hence the gains from international trade may be reaped (Dombusch, Fischer and Startz, 2013).
Later, the concept of comparative advantage was introduced by Ricardo who advocated that advantage should be determined not in terms of lower production cost but in terms of lower opportunity cost. Thus, any nation which has a lower opportunity cost for production of a given good as compared to the other nation has a comparative advantage in the production of that particular good (Koutsoyiannis, 2013). This is a superior concept as compared to the absolute advantage concept as exhibited from the following example. Consider the following data provided.
As per the concept of absolute advantage, Portugal should export both cloth and wine since it produces both goods at a cheaper labour cost as compared to England.
Opportunity cost of production of cloth for England = 5/6 wine units
Opportunity cost of production of cloth for Portugal= 9/8 wine units
Since the opportunity cost of cloth is lower for England, hence England should specialise in the production of cloth only, while Portugal should produce only wine. In this manner, both the countries would end up gaining from international trade (Dombusch, Fischer and Startz, 2013).
On the basis of the above discussion, it may be concluded that while absolute advantage is based on lower production costs, the comparative advantage is based on lower opportunity costs. The preferable model is the comparative advantage one since it results in mutual gain for both the countries involved in trade.
Dombusch, R., Fischer, S. and Startz, R. (2012), Macroeconomics, New York: McGraw Hill Publications
Elder, R. W., Lawrence, B., Ferguson, A., Naimi, T. S., Brewer, R. D., Chattopadhyay, S. K., Toomey, T. L., & Fielding, J. E. (2010), The effectiveness of tax policy interventions for reducing excessive alcohol consumption and related harms, American Journal of Preventive Medicine, 38, 217-229.
Fullerton, D., & Metcalf, G. E. (2002), Tax incidence, In A. J. Auerbach & F. Feldstein (Eds.), Handbook of public economics (pp. 1787-1872), Amsterdam: Elsevier.
Koutsoyiannis, A. (2013), Modern Macroeconomics, London: Palgrave McMillan
Krugman, P. and Wells, G. (2013), Microeconomics, London: Worth Publishers
Mankiw, G. (2014), Microeconomics, London: Worth Publishers
Rabinovich, L., Brutscher, P. B., de Vries, H., Tiessen, J., Clift, J., & Reding, A. (2009), The affordability of alcoholic beverages in the European Union, Cambridge: RAND Europe Technical Report.