Running head: ALCOHOL ABUSE 1

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Alcohol Abuse
The Economist Approach
To an economist, the problem of alcohol abuse is viewed as an externality in
both consumption and production. The value to consumers is greater than the value to
society. Alcohol consumption is linked to many social problems, and addressing these
problems diverts a significant amount of resources that could have been used in other
productive activities. The two potential solutions include the use of taxes or Pigouvian
regulations. These will help to raise the cost (price) of alcohol consumption through
increased taxes and reduced availability. The second solution relates to imposing tariffs
on producers involved in the production and sale of alcohol. Such a policy reduces
alcohol consumption because the producers transfer the taxes to the final consumer,
making alcoholic beverages more expensive for the consumers (Lipsey & Courant,
2008).
Prescription Drugs
Garrod and Willis (2007) note that the law of demand and supply is one of the
most primary principles that run an economy. Prescription drugs are those types of
drugs that the government regulates through legislation, and they are not sold over the
counter. Consequently, the cost of prescription drugs is related positively with the cost
of health care in the economy. When the cost of health care is high, prescription drugs
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will take a big portion of the consumer`s budget leaving less income for the other goods
and services. Similarly, if the prices for prescription drugs are low, more money will be
available to spend on other goods and services.
Significance of Elasticity of Demand in Analyzing the Impact of a Shift in Supply
Price elasticity of demand measures the degree of responsiveness of quantity
demanded to changes in prices. Quantity demanded is determined by individual
preferences, psychological variables, and social factors. When an increase in the price
of a service or a product leads to a proportionately larger decrease in the quantity
demanded, the demand is said to be elastic. On the other hand, demand is said to be
inelastic when an increase in price of a product or service does not significantly reduce
the quantity demanded. Demand elasticity is a significant factor in analyzing the effects
arising from shifts in supply. For instance, when the demand for a given good or service
is inelastic, an increase in tax entirely falls on the consumer. Suppliers react to the
increased tax by increasing the price of the product, and the demand remains
unchanged. On the other hand, when demand is inelastic, in a situation where a product
or service has alternative purchases, the suppliers will incur the entire tax burden
because increasing the price will result in a decrease in demand (Lipsey & Courant,
2011).
Significance of Elasticity of Supply in Analyzing the Impact of a Shift in Demand
Price elasticity of supply measures the degree of responsiveness of quantity
supplied to changes in prices holding other factors constant. Elasticity of supply is of
significance in analyzing the impacts of demand shifts (Lipsey & Courant, 2011). For
example, if the demand for rental houses increases, the economy will face a shortage of
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rental apartments at the original price. Consequently, rental prices will increase. The
increased demand pushes prices up, implying that suppliers respond to price increases
by increasing supply.
Examples of Increasing-Cost Industries and a Preposition of Why They Would
Have a Positively Slopped Supply Curve
The increasing cost industry represents a perfectly competitive industry that has
a positively sloped supply curve. This can happen because either the industry`s
expansion increases the costs of production and prices for factor inputs (diseconomies
of scale) or because of a shortage in the factor inputs. For instance, the increase in
demand within the computer industry implies that consumers are willing to pay a higher
price. Existing companies in the industry such as Dell, HP, Toshiba, and Acer will
increase their respective quantities supplied. An increase in prices motivates suppliers
to increase output, the supply curve shifts outwards. The supply curve for the industry
will be positively sloped because salaries and wages for computer engineers and
programmers have increased, pushing up the total production costs. The second
example relates to an industry, which is suffering from an insufficient supply of labor. To
increase the volume of output produced, the industry will have to increase wages to
attract labor leading to increased production costs and a positively sloped supply curve.
Conditions under Which a Perfectly Competitive Market is Economically Efficient
A market is said to be perfectly competitive if no players in the market possess
market power such that they can influence the price of a product or service. Economic
efficiency is achieved in a perfectly competitive market because the ability and
willingness of the buyers to buy any volume of a given identical service or product at a
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set price is not restricted. Similarly, the ability and willingness of the suppliers to bring
their products and services to the market at a given price level is not restricted. A
perfectly competitive market permits adjustments to reflect the changing market
conditions given that factor inputs are variable in the long-term. In the long-term, all
producers and consumers know the price and quantity of the product with certainty. This
makes all the trading parties better off.


















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References
Garrod, G. & Willis, K. (2007). Economic Valuation of the Environment: Methods and
Case Studies. London: Edwards Elgar.
Lipsey, G. & Courant, N. (2008). Impacts on Future Environmental Economics. New
York: HarperCollins Publishers Inc.
Lipsey, G. & Courant, N. (2011). Cost-Benefit Analysis. New York: HarperCollins
Publishers Inc.