Alcopops Tax

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Question 1
Some economists argue that one of the key political motivations for the introduction of the alcopops tax is to correct for the negative externalities which abusers of alcopops impose on society. Using diagram(s) discuss how a tax on alcopops can correct for negative externalities associated with excessive consumption of alcopops.

In a publication by University of Southern Queensland (2008), it defines that ‘excise taxes are taxes imposed on sellers of certain goods and services, and they are usually substantially higher tan sales tax on regular goods’. Moreover, ‘tax incidence is the share of a tax ultimately paid by consumers or by buyers’ (Layton, Robinson & Tucker 2005). It depends on both elasticities of demand and supply. In economic, compulsory levy a higher tax for alcopops is a good way to correct for negative externalities associated with excessive consumption of alcopops. If the government imposed a $100 per 1,000 litres excise tax on suppliers of the alcopos over all price ranges, both suppliers and consumers share burden of tax. On account of the elasticity of demand for alcopops use is inelastic, consumers would bear full burden of tax.

This graph shows the effect of a negative externality. The curve for alcopops demand is D and the curve for alcopops supply is S1. The cost of alcopos is higher when tax get higher. The curve for alcopops after tax has becoming S2. Because of the tax, the demand of alcopops had been lower, we can know it by the new equilibrium point. After all, we can know how a tax on alcopops can correct for negative externalities associated with excessive consumption of alcopops.

Question 2
Do you expect the demand for alcopops to be elastic or inelastic? Why? How about the elasticity of supply of alcopops?

I expect the demand for alcopops to be elastic by the following 3 points. * The length of time involved
When the price of alcopops increase, the demand of alcopops will decrease rapidly. This means alcopops is elastic. * Necessities versus luxuries
Alcopops is kind of luxuries, because people just need it for fun or something else. It’s not affect their life for most people. It means it isn’t necessary to dring alcohol. * Definition of market.

There’s many kinds of drinks in the market. If alocopops price goes up, most people can choice some other drinks. * Share of expenditure on the good in the consumer’s budge For most people, alcopops just use for party and a little for meal. So, in people’s budget for expenditure, alcopops just little in it.

I expect the supply for alcopops to be elastic. We can use the concept of elasticity to measure the responsiveness of firms to change in price just as we used it to measure the responsiveness of consumers.

In my opinion, the demand for alcopops is inelastic, and the supply for alcopops is elastic.

Question 3
If your answer about the price elasticities of demand and supply is right, then will the burden of new sales tax be borne more by suppliers or more by consumers? Explain.

I expect both of the demand and supply is elastic. Because alcohol is easy to make and haven’s some great profit in it, so the selling price is cheap. We make an example by this case. We suppose there’s a alcopops business runs like that. Cost for pre litre of alcopops is $18, profit for pre litre is $2, and now they should add $2 for pre litre for tax. Because the demand is elastic, it means businessman have keeping their selling price in a low level, so they don’t have many price to cut, and they need to increase the selling price almost into $22 to keep their profit. From this example, we know that the burden of new sales tax be borne more by consumers.

Question 4
Now we assume that the alcopops industry is perfectly competitive and the alcopop products are identical. We also assume that before the tax was imposed, alcopops producers earned zero economic profit. Discuss the impact of the alcopops tax on the...
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