November 9th 2014
Alcoholic beverages and consumption of these particular beverages are a widely accepted practice in Canada, and among a majority of Western societies. According to a study conducted by the Centre for Addiction and Mental Health of Canada, over 80% of Canadians consume alcohol in moderation (Ialomiteanu et al, 2012). However, despite the popularity of alcohol consumption across a large population set, the negative consequences are becoming a fact that cannot be ignored. As a result of excessive alcohol consumption, chronical illness can arise such as liver disease, heart implications, heart strokes, and high blood pressure, among many other illnesses (CDC, 2014). The raising threat of chorionic illness and risk of premature death is a primary factor in the cause of economic costs and social costs that result in a market inefficiency. Economic costs and social costs as a result of illnesses caused by excessive alcohol consumption include negative externalities, decreased labor force productivity, and increased medical care expenditures. One policy to combat the negative externalities associated with excessive alcohol consumption is to raise current taxation on alcoholic beverages to reduce the overall supply and demand of alcohol in the Canadian market. This particular paper will aim to analyze the effectiveness and ineffectiveness of implementing an increased taxation on alcoholic beverages to promote less consumption and ultimately promote a healthier economy. Through examination of economic implications, advantages of increasing alcohol taxes, and the disadvantages of increased alcohol taxes, this paper will aim to answer the question of whether an increased tax of alcohol is an effective method to decrease consumption.
Law of Demand Theory
Another critical economic implication of increased taxation is the effect on aggregate demand. Aggregate demand is calculated through an analysis of consumption, investments, government expenditure, and net exports (Hildenbrand, 1983). The most critical variable that is relevant in terms of increased taxation is the consumption function, which is a function of disposable income and taxes. If the variable for disposable income increases, then the consumption function increases as well due to the fact that both variables are positively correlated. However, if the variable for taxes increases, then the consumption function decreases, due to the fact that both variables are negatively correlated (Hildenbrand, 1983). In the case of increased alcohol taxation, consumption will in theory decrease following the law of demand. The theory behind taxation to reduce demand, is to shift the demand curve to the left on a supply-demand curve. A left-ward shift of a demand curve will ultimately demand less of a particular good in comparison to the same price point before taxation (Hildenbrand, 1983). In addition, reduction in demand due to a taxation of a good changes the optimal market point in a supply-demand curve. The optimization point where demand and supply equal will be at a point of reduced supply to compensate for the decreased demand in theory (Hildenbrand, 1983). In regards to alcohol taxation, the main objective of the taxation policy is to implement law of demand theories to eventually reduce overall demand for alcoholic beverages to promote a healthier economy.
Price elasticity is an economic measurement of how the market responds to particular change in price of a good. Price elasticity provides an understanding on how the market will react to a price change of a certain good, such as increase in taxation (Hoffer et al. 2013). According to a study conducted by J.P Nelson on economic demographics of alcoholic consumption, it became evident that alcohol demand is inelastic, meaning it is less responsive to price changes