Economic approaches to pricing and taxing alcohol abuse

Economics of Alcohol Abuse

Econcs Of Drugs & Alcohol

How an Economist Might Approach Alcohol Abuse

One answer would be to raise price by decree. Holding all other factors the same, this artificial price increase would initially reduce quantity consumed, but there would still be demand that went unfulfilled, which implies foregone profit at the new lower quantity and higher shelf price. Were supply restricted, say through a fixed number of licenses, this triangle would represent profits producers would want to capture but could not under the artificially high price. Were the price rise caused by say input costs, in the long run producers who could achieve economies of scale would increase production, so price would fall back to the original at higher quantity (Chen, 2007, p. 1), but this would be impossible were supply artificially limited, and if the profits were taxed away there would be no incentive to increase supply. In the case of a tax, the result would be a transfer from the producers to the state with unfulfilled consumer demand at a new artificial lower quantity and higher price, which would normally be a deadweight loss to society. If there were social costs to alcohol abuse, the artificial restriction of demand would offset some of that loss and if the tax went to the same general fund it would also offset that cost.

But this story above assumes all consumers can quit. Were alcohol addictive, the addicts would consume at any price regardless of supply after all the casual consumers had been priced out. The market solution might just reduce the personal income of the lowest-earning abusers, cause them to commit crime, or if they had to work more to support the higher price of their habit, this assumes there was work to be had. One way to deal with this element would be to offer difficult rehabilitation in exchange for controlled dosages for those who couldn't afford the new higher cost. As more alcoholics gave up, total social cost from enforcement and damages would fall, workforce productivity might increase, and any remaining program costs could perhaps be shifted onto offenders who could afford to pay. Price controls and taxation can reduce supply and quantity supplied, but the ultimate long run solution is to reduce demand for products that generate social costs. This is not possible in some cases, say for lifesaving drugs, where consumers will do anything to obtain, or society feels refusal is not appropriate either. This analysis made and tested assumptions with all others held constant, then tested those assumptions, considered the effects at the margin and ways incentives could encourage behavior as per the four elements of economic thinking (Heyne, 1998, n. p.)

Prescription Drugs Affect the Demand and Supply of All Other Products and Services

Research cost spent on developing new drugs could be applied to other production, as could the shelf space, advertising, packaging and shipping expense, and the chemicals in prescription drugs. Therefore prescription drugs increase the demand for all other products that compete for those scarce resources; in the widest sense, with every single other product. Such competition for resources restricts the supply and thus raises the price of all other goods that could be made with the time, energy and materials required to bring the drug to market.

On the other hand this research, sales, promotion, distribution and the effects of the drugs may increase demand for other products in some ways and reduce them in others. If medical students pay for college to be able to prescribe the drug, the instructor has a job, as do the researchers, truckdrivers, sales reps and the doctors who deliver it. If the drug keeps people alive longer, they may demand more goods and services than before the drug, which would pull supply higher (in theory) over the long run, or raise prices in the short run, which means more revenue for producers. This may or may not be more than before the pill was invented, if the pill cured the disease at a much lower cost. If someone invented a $1 pill that cured cancer, the resulting fall in demand for high-priced intensive care would either devastate the medical industry, or those producers could switch to treating other diseases.

Two (2) Examples of Increasing-cost Industries

One increasing-cost industry is fire protection. The farther away from the station the fire, the more gas and time it takes to get there, and so a distant fire would do more damage because of the lag than would a closer one and also require higher input cost and perhaps opportunity cost. Likewise electricity: the farther away from the generating plant, the more cable and transformers it requires to deliver; hence supply cost increases with quantity produced.

Suggest how, under certain conditions, a perfectly competitive market is efficient

Returning to the pharmaceuticals example, when price is above the equilibrium supply and demand price, some consumers would be willing to pay for more goods, which would be profitable, so producers would come forward or existing producers would expand production to fill the shortage and capture those profits (Pindyck and Rubinfeld, 2009, Slide 8). Otherwise resources that could have value added to them would go unutilized. On the other hand, if producers make more than they can sell, that leads to storage cost or total loss if the product is perishable, and over time the firm that loses the least will be able to offer lower prices, and thus take market share from the wasteful producer (given standardized products). The less-efficient producer goes out of business and only the demanded amount of raw materials are consumed. Once any type of price control like ceilings; taxation; artificial monopoly like licensure, etc. are imposed, the result is inefficiency ceteris paribus, i.e. unless something else changes.