Hand-in Question 2

1. What was the reason for the introduction of this tax?

The instigating factor for the introduction of the 70 per cent tax increase on pre-mixed
drinks - dubbed alcopops was to combat binge drinking and in turn address alcohol
fuelled violence and the other various alcohol related impacts. In this case the targeted
product of this tax was specifically pre-mixed alcoholic drinks that were popular among
the younger age groups. Other secondary reasons for the introduction of the tax was the
opportunity of capitalizing on the market for pre-mixed drinks in order to gain revenue
and also to facilitate discussion on the issue of binge drinking.

2. Was it successful in achieving this objective? Use a demand and supply diagram
to explain to explain your answer.
In the following years after the implementation of the tax, instead of a resultant decrease
in the consumption of alcohol, reduction in binge drinking and other alcohol related
consequences, the introduction of the tax had little to no effect on the incidence of the
aforementioned problems despite the Consumption of pre-mixed drinks falling 31
percent between 2008 and 2011. This could be attributed to the abundance of
substitutes for alcohol and in this case pre-mixed drinks and it was evident in the
undiminished occurrences of alcohol related problems in spite of the fall in demand of
pre-mixed drinks.
With the implementation of the tax the Supply and Demand curve should shift leftwards
resulting in an increase equilibrium price and a decrease in equilibrium quantity.
However the change in demand is also reliant on the price elasticity of demand and
considering that the budget share of alcohol is relatively small in comparison to other
purchases it should be relatively inelastic due to the income effect and the negligible
effect on purchasing power. This is evident in the 70 percent tax increase on the price of
alcopops equating to a 31% decrease in the demand and thus showing an inelastic
elasticity of demand for alcopops. On the contrary the above mentioned abundance of
substitutes contributes to the cross-price elasticity of demand in which over the same
period, there was a 20% increase in consumption of pure spirits in response to the tax.
Therefore the Demand curve should be flatter to indicate the effects of the combination
of the many substitutes available.
Through these factors it can be seen that the objective of addressing and minimizing
binge drinking and its harmful effects was not achieved and thus was the tax was
unsuccessful.

3. What other consequences did this tax have?
As mentioned above the tax resulted in a subsequent increase of spirit consumption by
20% while there was a 31% decrease in alcopops consumption. This was due to the
existence of spirits as a substitute for alcopops/pre-mixed drinks. However while the
cross-price elasticity of demand between pre-mixed drinks and spirits may seem
relatively inelastic this does not take into account the presence of many other alcoholic
substitutes such as Wine , Beer and bar prepared cocktails to state a few. The tax also
had secondary motivations and repercussions in that there while there was a significant
gain in Government revenue there was actually an accompanying increase in spending
on. The problem with targeting one particular drink is that people will go and find
something cheaper, whereby the price increase of alcopops meant that spirits as a more
expensive quality distilled beverage was suddenly much more appealing and thus
indicative of the state of spirits as a normal good.