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Tutorial work, Hand-In questions & solutions, week 8

Microeconomics 1 (University of New South Wales)

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ECON1101 Microeconomics Hand In Question 2

1. What was the reason for the introduction of this tax?
The main reason was to reduce alcohol assumption and binge drinking among young people in
Australia. The government was hoping that by implementing a 70% tax increase on the price of
pre-mixed drinks, also know as alcopop and is considered by research to be the preferred
drink over other forms of alcohol, young people would be discourage from drinking and thus
reduces the number of hospital admissions and injuries caused by drinking alcohol.
2. Was it successful in achieving this objective? Use a demand and supply diagram to explain
you answer.

This tax on alcopops was not successful in trying to achieve its goal to reduce binge drinking by
teenagers. Since there were many substitutes available, such as mixing your own alcohol drinks,
it caused teenagers to switch to alternative type of alcohol beverages. This is shown in Figure B
where demand for alcopops is relatively elastic due to the large number of readily available
substitutes which teenagers can turn to. The large decrease in quantity demanded for alcopops
from Q to Q1 in Figure B showed that the response to a rise in price is young people switching to
substitutes. In effect, this reduces the effect of the tax and alcohol assumption for pure spirits
was increased by 20% in Australia after the implementation of the tax. Also, alcohol related
injuries and hospital admission did not decline as the government had hoped. Compare this to
Figure A, which indicated a tax on all types of alcohols, the demand curve becomes relatively
inelastic as there are minimum substitutes available. Consequently, there will still be a fall in the
quantity demanded for alcohol from Q to Q1 in Figure A due to the increase in price; however,
the reduction is relatively small compare to Figure B. This way, it eliminates the availability of
substitutes and thus making the teenagers take price into consideration when purchasing any
form of alcohol.
3. What other consequences did this tax have?
Although the tax did reduce teenage alcopops consumption by 30% during 2008-11, on the
other hand, the consumption of pure spirits increased by 20% during the same period. This
indicated that the effect of the tax on teenagers was merely changing their alcohol preferences
and thus shows the ineffectiveness of the tax in achieving its goal. Tax revenue collected during
2008-11 had fallen $411m short of the forecast made in the 2011-12 budget as a result of young
people consuming untaxed substitutes instead.

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