Raising the Tax on Alcohol- Business Economics Assessment

January 16, 2018
Author : Alex

Solution Code: 1IFI

Question: Business Economics

This assignment falls under “Business Economics” which was successfully solved by the assignment writing experts at My Assignment Services AU under assignment help through guided sessions service.

Business Economics Assignment

Case Scenario/ Task

Question 1-

You have been employed as an economist to advise the department of health and the federal govermenet about the following issue. The minister has argued that raising the tax on alcohol is the most effective way to reduce alcohol abuse in our society. DO you agree or disagree? Explain why or why not.

Question 2-

Explain the diffrence between comprative advantage and absolute adventage.

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Solution:

Question 1: Raising the tax on Alcohol:

Introduction:

Alcohol consumption has been on the increase in the Australian economy and the ways to reduce such abuse to increase the price of alcohol. The best way to do it is through raising the indirect tax on alcohol which would decrease the supply of alcohol in the economy and it would be effective in controlling alcohol abuse.

Analysis:

In the figure below, we have the demand and supply of alcohol bottles, the intersection of which gives the equilibrium price and equilibrium output. As such a output is seen to be more socially abusive on the economy, the government might impose a tax which would shift the supply curve to the left. The DD curve (demand) is the same and the SS curve (supply) has shifted to a new curve SS+tax (Hubbard, Garnett and Lewis, 2013)

economice

There are two types of taxes that can be imposed on the producers and they are per unit tax and ad valorem tax. For example, a per unit tax of 50 cents, will shift the supply curve parallel to the original supply curve as shown in the above diagram. This has reduced the quantity sold from Qe to Qt and has increased the price from Pe to Pt. Hence this will reduce the consumption of alcohol in the society since the price of alcohol has increased. An ad valorem tax on the other hand will shift the supply curve to the left by a certain percentage.

Conclusion:

Both the taxation methods will increase the price and reduce the consumption of alcohol in the country. Taxation is the most effective method of controlling the supply and consumption of any commodity – be it cigarettes or alcohol. It is most effective as it uses the price mechanism in controlling the supply of the commodity.

Question 2: Differences between absolute advantage and comparative advantage:

Introduction:

Countries specialise in production and trade of goods in which they have either absolute or comparative advantage. Absolute advantage implies that the country requires lesser inputs to produce a particular good and comparative advantage implies that the country has lowest opportunity cost for producing a particular good.

Analysis:

The following table and diagram explains the concepts of absolute advantage and comparative advantage. We consider two countries A and B producing two goods computers and motorcycles.

Motorcycles Computers
Country A 6 30
Country B 21 40

In this table we can see that country B has absolute advantage in the production of both computers and motorcycles as it can produce either 40 computers or 21 motorcycles with all of its available resources. But country A can produce only lesser quantities of either 6 motorcycles or 30 computers. Since country B can produce more of motorcycles and computers with the available resources, than country A, it has absolute advantage (Carbaugh, 2007).

However for measuring comparative advantage one has to see the opportunity costs foregone for producing motorcycles or computers. And for the production of motorcycles and computers, the costs in terms of labour hours are shown in the following table.

Motorcycles Computers
Country A 20 hours 5 hours
Country B 18 hours 4 hours

For Country A

Opportunity cost of producing motorcycle = 20/5 = 4 (it has comparative advantage over B)

Opportunity cost of producing computers = 5/20 =1/ 4  or 0.25

For country B

Opportunity cost of producing motorcycle = 18/4 = 4.5

Opportunity cost of producing computers = 4/18 =2/9  or 0.22 (it has comparative advantage over A)

Conclusion:

Since the lowest opportunity cost for producing motorcycles is for country A and it implies country A comparative advantage in production of motorcycles. Country B has the opportunity costs in producing computers, as it is lowest at 0.22 and hence it has the comparative advantage in the production of computers. Hence according to comparative advantage, country A will specialise in motorcycles and country B will specialise in computers.

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