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Taxation On Alcohol Essay

3290 words - 14 pages

Increased Taxation on Alcohol

Introduction
Alcoholic beverages and consumption of these particular beverages are a widely accepted practice in Canada, and among a majority of Western societies. According to a study conducted by the Centre for Addiction and Mental Health of Canada, over 80% of Canadians consume alcohol in moderation (Ialomiteanu et al, 2012). However, despite the popularity of alcohol consumption across a large population set, the negative consequences are becoming a fact that cannot be ignored. As a result of excessive alcohol consumption, chronical illness can arise such as liver disease, heart implications, heart strokes, and high blood pressure, among many other ...view middle of the document...

Aggregate demand is calculated through an analysis of consumption, investments, government expenditure, and net exports (Hildenbrand, 1983). The most critical variable that is relevant in terms of increased taxation is the consumption function, which is a function of disposable income and taxes. If the variable for disposable income increases, then the consumption function increases as well due to the fact that both variables are positively correlated. However, if the variable for taxes increases, then the consumption function decreases, due to the fact that both variables are negatively correlated (Hildenbrand, 1983). In the case of increased alcohol taxation, consumption will in theory decrease following the law of demand. The theory behind taxation to reduce demand, is to shift the demand curve to the left on a supply-demand curve. A left-ward shift of a demand curve will ultimately demand less of a particular good in comparison to the same price point before taxation (Hildenbrand, 1983). In addition, reduction in demand due to a taxation of a good changes the optimal market point in a supply-demand curve. The optimization point where demand and supply equal will be at a point of reduced supply to compensate for the decreased demand in theory (Hildenbrand, 1983). In regards to alcohol taxation, the main objective of the taxation policy is to implement law of demand theories to eventually reduce overall demand for alcoholic beverages to promote a healthier economy.
Price Elasticity
Price elasticity is an economic measurement of how the market responds to particular change in price of a good. Price elasticity provides an understanding on how the market will react to a price change of a certain good, such as increase in taxation (Hoffer et al. 2013). According to a study conducted by J.P Nelson on economic demographics of alcoholic consumption, it became evident that alcohol demand is inelastic, meaning it is less responsive to price changes compared to other goods (Nelson 1997). Nelson’s studies found the overall price elasticity of alcoholic beverages to be -0.52 (Nelson 1997). This particular value was determined by using weighted measurements of several alcoholic beverages, such as beer, wine, and spirits. However, it is important to analysis the price elasticity of subgroups in the market to get a better understanding on how certain consumers react to price changes of alcoholic beverages. Economist Michael Grossman provided an abundance of data regarding price elasticity of alcoholic beverages among different subgroups. One key subgroup Grossman analyzed was college students, who are considered to be high-risk group for health implications due to alcohol consumption (Grossman et al. 1998). Using a survey on alcohol consumption, it became apparent that in 1993, 40% of female college students and 50% of male college students reported to be binge drinkers (Chaloupka and Wechsler 1996). Through Grossman’s analytical review of data,...

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