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Economics Government Intervention Essay

1166 words - 5 pages

A common form of government intervention in the market is the raising of market price through indirect taxes. They can intervene into any market if they feel it to be necessary, but for an example in this essay, I will use the goods & services market; more specifically, the markets of alcopops and cigarettes. The government intervenes into these markets by applying a tax on the products to raise the price. The intervention is seen to be for the health of the public and subordinately, to raise government revenue. The effects of this government intervention have the obvious results of a lower demand for the products, though the question is also present on the industry’s well-being and ...view middle of the document...

In effect, if consumers want to maintain their previous levels of consumption, cigarettes would now cost $1 more per pack. However, as in the graph to the right, with the increase of a dollar, both supply and demand decrease and a new equilibrium is formed, where the new quantity is less than the initial quantity. [1]

In terms of actual statistics, the government intervention in the tobacco industry has resulted in a 12.5% increase in tobacco excise - a tax increase of three cents per cigarette. [2] This is little compared to the government intervention suffered by the alcopop market; excise tax of the pre-mixed drinks increased by 70% under the Rudd Government, meaning the level of excise has leapt from $39.36 per litre of alcohol content to $66.67. [3]

The reason for these government measures comes down to such things as public health and government revenue. Cigarettes are always associated to health problems and with the increase of tax, there’s a decrease in consumption. This in itself aids the government, as less health problems will occur and hence less pressure on the health-care system. That’s not to mention the revenue generated from them.

This applies likewise with the alcopop taxes, though these were aimed to stop binge-drinking among teenagers, who are the main consumers. As studies have shown, “Increasing the cost of alcohol, particularly those drinks whose taste and marketing appeal to young drinkers, is more likely to delay when underage drinkers start drinking and how much they drink”. [4] With alcopops being the main alcoholic beverage consumed by the youth, the tax will evidently hinder teen binge-drinking. Further studies have shown that the tax is proving its worth; “since the Excise Tax was introduced on April 27, 2008, alcopop sales have dropped by 29 per cent.” [5] In addition, the tax is expected to raise more than $2 billion in extra revenue over the next four years (to which the government will use to fund a new preventive health program).

The effects of this government intervention on price will be mostly positive though there can be some downsides from other perspectives. As outlined above, the excise tax on these products not only puts pressure on the supplier, but also the consumer. With a rise in price, there is a decrease in both supply and demand. This is a...

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