Suppose the government raises the legal drinking age in the UK from 18 to 21. Conduct an economic analysis of this policy to examine its impact on affected markets.
With reference to the above statement, if the UK government were to increase the legal drinking age from 18 to 21 there are two markets that would mainly be affected- the producers, which is the alcohol industry as a whole and the consumers who are the UK citizens between the age of 18 and 21. A market is a group of buyers and sellers of a particular good or service.(Mankiw) Alcohol is a demerit good. These are goods that are over-produced and over-consumed. They are goods that the government considers harmful for both the people who consume them and for society as a whole, and therefore would like to see them consumed to a lesser degree.(course companion, pg 137)
The intake of alcohol is a negative externality of consumption. An externality occurs when the production or consumption of a good or service has an effect upon a third party. If the impact is harmful, it is called a negative externality; if it is beneficial, it is called a positive externality.(course companion) This leads to market failure. Market failure occurs when the price mechanism results in an inefficient or grossly unfair allocation of resources. (www.bized.co.uk/virtual/dc/resource/glos4.htm) There are several ways of analyzing this question, one being through externalities- the government is simply trying to internalize the externality by imposing the law which changes the legal drinking age, thus creating a positive externality which will be beneficial to the society. Another way would be through analyzing the changes in demand, supply and elasticities and how they will affect the producers and consumers. In this essay I am going to concentrate on the latter.
Demand is the amount of a good or service an individual is willing and able to buy per period of time. By increasing the legal age from 18 to 21, there will be a...
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