This paper examines several interconnected economic topics through a series of short analytical sections. It begins with the economic costs and policy implications of alcohol abuse, including the role of sin taxes and their regressive effects. The paper then addresses the economics of prescription versus over-the-counter drugs, followed by an analysis of price elasticity of demand using the cigarette industry as a case study. It further explores increasing cost industries, using food service and the gourmet coffee market as examples. Finally, the paper discusses market structures — including collusion, monopolies, and the conditions required for perfect competition — providing a broad overview of applied microeconomic and public-policy concepts.
Alcohol for consumption is not a necessary food item, but for many it has become a standard part of adult culture. Increasing the level of alcohol consumption, however, moves from an economic paradigm to a social issue due to the ancillary health and behavioral effects of alcohol abuse. In turn, this becomes part of economics in that it requires fiscal resources to treat societal problems caused by alcoholism: domestic abuse, crime, traffic and driving violations, and so on. The economic effects of alcohol abuse are undeniable and are pervasive in both the overt and covert areas of the economy, in the short and long term (Fogarty, 2006).
In the economic sphere of political and social policy, alcohol — like tobacco and gambling — is subject to a "sin" tax that is ostensibly designed to reduce transactions for goods and behaviors society considers dangerous or undesirable. However, when it comes to alcohol, many argue that this type of sumptuary taxation policy can contribute to black markets, is regressive in that it discriminates against lower-income groups, and is not normally value-added (higher-quality products are more likely to be consumed by the wealthy). Sin taxes on alcohol also appear to fail to meaningfully affect consumer behavior, since alcohol consumption is largely an individual decision (Williams and Christ, 2009). The government views taxing alcohol as a way to raise revenue to both police and control the product — adjusting the supply and demand curve — while the alcohol and cigarette industries view raising sin taxes as counterproductive to the overall economy, citing negative impacts on jobs and local businesses such as restaurants, bars, and liquor stores (Tobacco, Alcohol, 2012).
Potential economic solutions to alcohol abuse, depending upon the paradigm, might include additional funding for education to teach young people the difference between safe and risky drinking and to screen for alcohol problems, expanding coverage of treatment through health insurance, and providing monetary support for treatment and recovery through economic policy. Because alcohol abuse costs over $130 billion in lost productivity, it is important to minimize that effect not only through taxation on consumption, but also through the ability to reduce abuse from a socioeconomic model (Ensuring Solutions, 2011).
A prescription drug is a licensed medication regulated by law to require a medical prescription before it can be dispensed. This is in contrast to over-the-counter (OTC) products, which may be obtained without a prescription. In the United States, the Food, Drug and Cosmetic Act defines what constitutes a prescription drug, requiring certain clinicians to write a prescription or order for that drug. This requirement is designed to protect the public from overuse of narcotics and to ensure that individuals consult a medical professional before taking certain substances (Avorn, 2004). From an economic perspective, the overall cost of prescription drugs tends to rise as the economy weakens: people have more trouble paying out-of-pocket expenses for drugs, demand slides, and prices increase. In addition, as the economy falters, consumers cut health spending, which has a measurable effect on both the manufacture and development of prescription drugs (Fuhrmans, 2008).
On the other hand, the ebb and flow of prescription drug costs has an effect on the OTC and non-regulated industry. For the vitamin and supplement industry, rising prescription costs and media coverage sometimes push consumers toward more natural options, even when those options are not covered by traditional health insurance. OTC remedies are often the first or second stage of self-care before seeking the help of a medical professional, particularly when consumers have little disposable income for even a co-pay. Length of time in doctors' offices, the cost and availability of drugs, and concerns about side effects and potential long-term effects also shape the extent to which prescription product costs drive the ancillary OTC market.
Economic paradigms examine the manner in which goods and services are produced, distributed, and consumed within a society. One primary principle is the interaction between production, price, and demand for a good. In general, price elasticity of demand is an economic measurement that shows the responsiveness of the quantity demanded of a good or service to a change in its price. The demand for a good is considered elastic when the elasticity coefficient is greater than one — meaning that changes in price have a relatively large effect on the quantity demanded. A number of variables affect price elasticity: the type of good, whether it is a luxury or a necessity, the duration of the market cycle, and the availability of the good. In most economic scenarios, as price increases, demand decreases — though this depends on where the item was priced to begin with (Mankiw, 2011). One illustration of the effects of supply and demand can be found in the cigarette industry.
Due to a number of causal but linked factors, it appears that long-term demand for cigarettes will drop as taxes and cigarette prices rise. Research summarized by Chaloupka (1998) shows that for every 10% increase in cigarette prices, there is an overall reduction in consumption of 4 to 5%. Furthermore, the effects of cigarette price increases are not limited to the reduction in the number of smokers or to the consumption amounts of current smokers cutting back. Studies equally show that half the impact of price on adult smoking operates on the actual decision to smoke in the first place. The flip side is that as cigarettes become more expensive due to taxation and demand falls, less tax revenue will be collected to deal with the economic impact that addicted smokers have on society. While estimates suggest at least an 8% reduction in smoking over time based on current trends to raise cigarette prices — causing fewer people to start smoking — it will be some time before enough smokers have lowered their consumption or quit entirely for this to produce a measurable positive effect on the healthcare and employment markets (Chaloupka, 1998).
"How entry of new firms raises long-run costs"
"Monopoly types and conditions for perfect competition"
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