Can Government Intervention Be Effective in Correcting Market Failures Associated with Alcohol?

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Can government intervention be effective in correcting market failures associated with alcohol?

I have chosen to perform a microeconomic analysis surrounding the effect of Alcohol consumption on society. ‘Can government intervention be effective in correcting market failures associated with alcohol’ is the question set. The model I will be exploring is ‘market failure’ ‘where the market mechanism fails to allocate resources efficiently’ (Smith et al, 2006, p.56)

The Times

‘Alcohol-related treatment costs the NHS £1.7bn.’

The Telegraph

Londoners are losing an astounding 1.68 million working days as a result of alcohol-related absence.’ ‘The Telegraph’ microcosmically displays how the issue prevails all around us as a society. It’s clear from numerous sources including ‘Alcohol Concern’ describing the ‘epidemic’ proportions of the problem. Mark P. Taylor describes Economics as ‘The Study of how society manages its scarce resources’ (2006, p.5). The issue is clearly rooted within individual decision making as well as analysing how society is allocating its limited resources. The 3 major issues below exemplify the 3 main causes of the market failure. Information: Failure to provide good information (a public good) is a major cause of market failure and brings about the consequences of drinking alcohol hence reducing the efficiency of the market. Evidence suggests that advertising has strong detrimental effect on consumption, particularly for youth. (Saffer and Dave, 2003). The development of Markets promoting alcohol consumption benefits the industry groups however no such private incentives provide information that presents the negative consequences of consumption. Self-control issues:‘1.2 million incidents of violence are alcohol-related’ (The Times, 2007) and 360,000 incidents of domestic violence (Simmons,, perpetrated show lack of control. Intervention is happening, a four-year government review into the nation's alcohol culture found a system that encourages people to consume until they collapse incurring costs such as health on society as a whole, so the goods and services provided by the market are not in our best interests costing our society its efficiency. Externalities: Alcohol (a De-Merit Good and not in societies best interests) creates private costs for individuals and more general social costs, for example behaviour by those intoxicated in the broader community. Exemplifying the issue is the NHS and the medical costs incurred by alcohol consumption, which are not borne only privately by the individual. Above-average medical costs will be met partly from public funding. For this reason alone there should be a public interest in restricting use of alcohol. Decision makers do not take into account the cost imposed on society and others as a result of their decision

So the data has been highlighted and the issue displayed, it is now time to utilise models and concepts to try to ultimately answer my question. Alcohol has costs, these consist of marginal private costs (the cost that the individual incurs on themselves) when purchasing Alcohol i.e. money or time etc as well as fixed costs like transport costs to venue, also the opportunity cost of all the resources used up by those costs. The other costs include external marginal costs; these might include time off work, health costs etc. Both costs added together produce a marginal social cost, the cost to society as a whole incurred by alcohol usage:

Private Marginal Costs (PMC) + External Marginal Costs (EMC) = Social Marginal Cost (SMC) Given the ‘market-failure’ reasons for seeking to restrict alcohol consumption what are the governmental policy options for regulating alcohol use? Information: I propose the government should correct market failure, providing accurate information about the negative consequences of consuming alcohol and to restrict advertising that emphasizes the inaccurately optimistic positive...
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