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Can Higher Alcohol Tax Mitigate Costs on Society?

CASELET, MANAGERIAL ECONOMICS
ET Cases, 4 pages
AUTHOR(S) : Jena, Akshaya Kumar

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Can Higher Alcohol Tax Mitigate Costs On Society?

 

“No longer drink only water, but use a little wine for the sake of your stomach and your frequent ailments.”1

– The Holy Bible

 

“People who drink to drown their sorrow should be told that sorrow knows how to swim.”2

– Ann Landers

 

“I drink Champagne when I win, to celebrate. And I drink Champagne when I lose, to console myself.”3

– Napoleon Bonaparte


Excess of anything is said to be bad – whether it is wine or sunshine. Excessive consumption of alcoholic beverages, for example, is fraught with manifold ills such as drunk-driving, vandalization, injuries, diseases, homicides, assaults, rapes, spouse mistreatment, child abuse, suicides and various other violent and risky behaviors. This sets the worried Government agog on a demand-dipping policy in the form of hiking tax on alcohol that foists a higher alcohol price on consumers. However, the hike in alcohol price affects the alcohol consumption of different categories of drinkers differently depending upon the degree of their addiction.

Types of Alcoholics

The alcoholics of the society may be categorized into two types: heavy drinkers and the light drinkers. The former are almost likely to persist with their previous quantum of consumption or thereabouts no matter how high the price is soaring; whilst the latter are inclined to cut down or even cut out the consumption if price of alcohol starts clambering up the ladder. So the efficacy of the alcohol tax in reducing consumption hinges on the price elasticity of demand of the respective drinkers. All this boils down to the neat poser: whether the targeted drinkers are the moderate ones or the hardcore ones..................




  • 1 h t t p : / / l a v i s t a c h u r c h o f c h r i s t . o r g / LVa r t i c l e s /LittleWineForYourStomachsSake.html
  • 2 http://abazoo.angelfire.com/lquotes.html
  • 3 http://www.lamaisonduchampagne.nl/over-champagne/champagne-quotes/

Teaching Note Preview

Can Higher Alcohol Tax Mitigate Costs On Society?

 

Synopsis

The Law of Demand (LOD) and Price Elasticity of Demand (PED) are two significant economic concepts that have a very high practical value across several management decision-making areas, especially the marketing mix (4Ps) decisions. This caselet, in the backdrop of alcohol consumption, is used to construct the basic premises of LOD and PED along with a focused application-orientation.

Position and Setting

This caselet can be used as an inaugural caselet in Managerial Economics Course for Demand Analysis for 1st year/1st Semester MBA students.

Expected Learning Outcomes

At the end of this case discussion, the participants would/are expected to know:

  • • The twin concepts of LOD and PED
  • • The various types of PED
  • • The relationship between PED and Total Revenue (TR) and the resultant policy implications of taxation, and how this relationship can affect pricing and consumer behavior decisions

 

Assignment Questions

  • I. What is meant by the Law of Demand (LOD)? Does the law apply to hardcore alcoholics?
  • II. What do you mean by Price Elasticity of Demand (PED)? How is it different from Law of Demand (LOD)?
  • III. What are the different types of Price Elasticity of Demand (PED)?
  • IV. .....................

 

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Product code: ME-2-0002, ME-2-0002A

Abstract


This caselet enables a discussion on how the Law of Demand (LOD) and the Price Elasticity of Demand (PED) work in alcohol market. Excessive alcohol consumption imposes significant costs on society in various forms. But its deprivation also entails wellness cost. Therefore, price hike ought to reduce consumption of alcohol significantly in case of heavy drinkers who tend to abuse it; and marginally, if at all, in case of moderate drinkers who sip for health reasons. But whether the boot of reality is on the other foot or on the intended foot is the moot point! The concept of price elasticity of demand is the proper guide to gauge the efficacy or otherwise of alcohol taxation in mitigating social costs. This caselet helps to explore the relationship between PED and Total Revenue (TR) and the resultant policy implications of taxation, and how this relationship can affect pricing and consumer behavior decisions.



Pedagogical Objectives

  • To understand the twin concepts of Law of Demand and Price Elasticity of Demand
  • To analyze the various types of Price Elasticity of Demand



This Case Pack Includes:
- Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
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