A recent study in the US found that increasing the excise tax (tax paid on the purchase of a specific good) on alcohol products could lead to a reduction in consumption by as much as 20%. The responsiveness of demand to the subsequent change in price differed between alcohol products, with beer expecting a 20.5% decrease and wine expecting a modest 4.68% decrease.
The research was carried out by the US Department of Health in an attempt to discover ways of dealing with the alarming rates of alcohol consumption across the country.
Given the price inelastic demand for alcoholic drinks, the higher tax rates will also generate more tax revenue for the government which could be used for funding other policies to tackle alcoholism.
In light of these new findings, there are calls on policy makers to quickly pass through the new tax legislation, as the proposals are projected to save thousands of lives in the next few years.
Q1. What is meant by the term price elasticity of demand?
Q2. Explain one reason why the demand for alcohol is likely to be price inelastic?
Q3. With the use of a diagram, explain why taxing inelastic products will lead to more tax revenue for the government.
Q4. With reference to the article, analyse the impact that an increased excise tax will have on the demand for alcohol products.
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