The government has a primary role of ensuring that the economy is operating well and that it is free from externalities. Externalities (especially the negative ones) are actions that are done by a party but ends up impacting another party whether knowingly or unknowingly. Consumption of alcohol always gets out of control particularly when the prices for alcohol are too low. The consumption for alcoholic products obeys the law of demand since its level changes with price variations. When prices are low, consumers buy more but buy less when prices are high. The price elasticity of demand (PED) helps in showing the expected changes in demand when price is varied by a unit (Sivagnanam & Srinivasan, 2010). Many economists have argued that the demand for alcoholic products falls under an inelastic demand such that a unit price change may have less influence on the quantity demanded. This paper will try to prove whether this assertion is true. If it will be confirmed to be true, the paper will guide the government policy makers in determining the appropriate action to take so as to lower the consumption of alcohol. Alcohol is both harmful to oneself and to the whole community. Some people are so addicted in its consumption such that they can’t go a day without it. This people end up neglecting their primary responsibilities such as caring for the family and their productivity at their job places goes down. This is detrimental to the economic growth and thus the rationale for its price control by the government.
The paper will also help in understanding the market structures. It will provide the characteristics of different market structure that mainly affect the markets operations. It will also explain why it is difficult for a company to survive in such a market whereas another company may not be able to compete in a similar market. Investors will therefore be able to determine the most profitable market structures to venture into.
The figure on demand model for Euromonitor International’s Industry shows the various elasticities of demand for alcohol products. The model is specifically one sided model (negative side) meaning that alcoholic goods are normal goods and their demand are inversely related to the selling price such that a price rise results in a demand decline and a price fall results in a demand rise. In the model, it can be observed that different alcoholic products differ in their elasticity of demand. I.e. whereas it’s too high for high strength premixes, it is too low for the blended scotch whiskey. Suppliers of alcoholic products are mostly interested in such products such as the blended scotch whiskey with a low PED. This is because it enables them to influence the price without much influence on the quantity demanded.
This paper will not consider the individual PED since there is an assumption that consumers would shift from one product to another when the price for one increases and the other remain unchanged. We shall therefore use the overall PED for alcoholic product determined in the model to be – 0.45 (inelastic demand). When the government employs the policy of tax raise on alcoholic products, it creates an additional burden to the tax payers. However, since this tax is an indirect tax, it’s the consumers of alcoholic products alone who feels the squeeze (Sadowsky, 2010). The squeeze could be felt by the suppliers if they are unable to raise the consumer prices. PED is used in defining the party that suffers the extra tax burden.
The equilibrium point before the tax increment is at point c (Po, Qo). The slope of the demand curve is steeply inclined as a sign that it is inelastic. The tax causes the prices to be raised from Po to P1 and consequently the quantity demanded declines from Qo to Q1. Before tax, the consumer surplus was area fcx and the producer surplus was area fcy. The change in demand is too small compared to the price increment. Therefore consumers suffer a greater tax burden. The tax burden is area abde where abgf is the burden on consumers and fgde is the burden on producers. Due to this tax imposition, the new producers’ surplus is edy which is lower than the initial fcy, and the new consumers’ surplus is abx which is lower than the initial fcx. A deadweight loss results and is equivalent to area bcd. The greatest tax burden is therefore concluded to be carried by the consumers when the demand is inelastic.
The equilibrium point before the tax increment is at point c (Po, Qo). The slope of the demand curve is not steeply inclined as a sign that it is elastic. The tax causes the prices to be raised from Po to P1 and consequently the quantity demanded declines from Qo to Q1. Before tax, the consumer surplus was area fcx and the producer surplus was area fcy. The change in demand is too big compared to the small price increment. Therefore producers suffer a greater tax burden. The tax burden is area abde where abgf is the burden on consumers and fgde is the burden on producers. Due to this tax imposition, the new producers’ surplus is edy which is lower than the initial fcy, and the new consumers’ surplus is abx which is lower than the initial fcx. A deadweight loss results and is equivalent to area bcd. The greatest tax burden is therefore concluded to be carried by the producers when the demand is elastic.
The equilibrium point initially is at point e (PoQo). The main goal of a minimum pricing strategy is to discourage demand, thus, this price P1 is set above the normal selling price. According to Woodhouse (2017) no seller is allowed to sell below the fixed price. At price P1 above the normal selling price, demand is discourage and falls to Q1. Consumers’ willingness to pay is minimized by the high price. However, the willingness of suppliers to supply more increases at the high price; their new supply level is Q2. Therefore an excess supply creates an oversupply in the market. Minimum price on alcohol therefore prevents the market from clearing.
Both are mean to influence the consumption level so as to achieve health improvements and reduction of negative externalities. From the analysis on part (i) and part (ii) above, it can be concluded that imposing an exercise tax is more beneficial and effective than fixing a minimum price on alcoholic products. This is because, with an excise tax, the government not only discourages consumption of alcohol, it also raise its revenues. In the case for minimum price, the government only influences the consumption level but no revenues is raised. An excise tax could be beneficial to either the supplier or the consumers depending on their elasticity to demand. In case for the minimum pricing, there is only one party that benefits (the suppliers). There is no way through which a consumer can benefit from minimum price set on alcohol. Comparing the effectiveness of the two policy strategies, an excise tax is more effective as it’s a must it be adhered to, but for a minimum price the supplier may practice illegal selling practices. The government should therefore at all times consider imposing an excise tax and completely avoid minimum pricing.
Table price in the long run will be above $ 200 because in the long run, the AC curve does not intersect with the AR (demand curve). They only meet at a tangency point. In the long run, only normal profits are made in a monopolistic competition. The AC curve generally is U-shaped and the demand curve is sloping negatively. Therefore, unless the demand curve was horizontal, it can never be tangent with the minimum point of the LRAC curve. Since demand curve will never be horizontal, the tangent point for the demand curve and the LRAC will never be at the minimum point. The diagram above shows the tangency point price and the minimum LRAC (where LRMC and LRAC intersect).
- There are many players in the market, but only a few large players dominating the market. In Australia, four firms from most industries control over 60 % of the market share (Kollmorgen, 2016).
- There are cost and competition barriers to entry. I.e. startup costs, and competition since the large players may fix their prices too lower to force the non-well established firms to exit the market.
- Price makers
- The large players may collude to form cartels to gain market power
- The products are either identical or differentiated.
- The decision of one player affect that of others.
The industries in Australia that fall under oligopoly include;
- According to Andrew (2014), the supermarket industry is an oligopoly since there are few major players dominating the market (Coles and Woolworths).
- According to Adiktd (2014), the banking industry in Australia is an oligopoly since it is dominated by 4 big banks (National Australia Bank (NAB), Westpac (WBC), Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank (CBA). He also quoted that of all the other markets, this industry has the highest entry barriers.
- According to Smith (2015), the telecommunication industry in Australia is an oligopoly since Telstra, Vodafone Australia and Telecommunications-owned Optus dominate the market.
Characteristic of monopolistic competition
- Numerous participants. Dwivedi (2006) noted that estimating the number of these sellers is difficult, but depending on the size of the market they may be 10 – 20.
- Perfect information
- Heterogeneous products. According to Baumol & Blinder (2009), the products are similar but slightly differentiated.
- Freedom of entry and exit
Examples of monopolistic completion industries in Australia
- The hairdressing industry according to Anders (2011) is a monopolistic competition industry since the sellers’ products and skills are slightly differentiated.
- The smartphone industry according to Joshi (2016) is a monopolistic competition industry since they offer a wide range of smartphones that are differentiated.
- The bakery industry according to Narula (2017) is a monopolistic competition industry since the bakers are many and different prices can be charged depending on competition in a given area.
Duopoly competition occurs when there are only two firms dominating the market and are able to satisfy demand. The two firms must be able to produce at the lowest cost. There must be huge economies of scale so that other firms are unable to join the market.
The price charged is equal to the minimum point of ATC and thus greater economies of scale. Other markets cannot survive in this market. So entrance is hindered by the economies of scale.
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