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,...
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