Sales of wine and beer fell drastically in Canada from 2021-2022, demonstrating that the Canadian government’s crackdown on alcohol consumption seems to be doing the trick.
Alcohol is a demerit good and governments around the world are often scratching their heads for ways to reduce consumption. The external costs on society can be severe, with huge amounts of money needlessly spent each year on dealing with antisocial behaviour, criminal damage, and the additional burden on the healthcare system.
The Canadian government has introduced stricter drinking guidelines in recent years and is also on the verge of passing a new alcohol tax into law this April. The new alcohol tax will increase the current levy to 6.3%. The tax hike, in addition to the rising costs of production such as barely and transportation for beermakers, is likely to push beer prices up significantly. This will only dampen demand further – bad for beermakers but good for society.
Q1. Define the term demerit good.
Q2. Explain two externalities associated with alcohol consumption.
Q3. With the use of an appropriate diagram, analyse the impact of an increase in the Alcohol tax on the market for Alcohol.
Q4. Discuss the effectiveness of increasing the alcohol tax on reducing alcohol consumption.
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