Discuss economic arguments for and against imposing substantially :: Economics

Discuss economic arguments for and against imposing substantially higher taxes on sale of alcohol. Governments interfere in markets and their working with the primary purpose of provision of welfare to people and preventing market failure. There are many methods of intervention such as - taxes and subsidies - buffer stocks - applying maximum and minimum prices - provision of public goods and services - provision of education and training - legislation and market reforms Applying taxes has two purposes: to generate revenue for the government and to discourage consumption and output of certain goods, usually demerit goods. Demerit goods are those goods that are usually over consumed by in a market system, and have social costs exceeding social benefit due to high negative externalities. They contrast merit goods which are desirable for the welfare of society, as positive externalities exceed negative externalities. Taxes out on goods such as alcohol are considered indirect taxes. Depending upon the price elasticity of a good, and its demand and market price, government places either - specific taxes that are of a specific number, e.g. 10 dirhams on every bottle of beer - ad valorem taxes that add a percentage of the market price onto taxes e.g. 5% of price of beer A government must analyze the effects of taxing, or increasing taxation on a good, whether or not the taxation satisfies the goals. The Social costs of alcohol involve the cost of production, cost of purchase and negative externalities such as alcohol poisoning and drunken driving deaths and violence. The social benefits are the profit made by producers, the utility gained by consumers and externalities such as prevention of heart diseases. The imposing of substantially higher taxes on the sale of alcohol may be good in two ways: Firstly, alcohol is regarded as a habit forming good. Hence it may be assumed that either it disobeys the law of demand (quantity demanded of a good is inversely proportional to change in price, all other factors remaining constant), or it is price inelastic (a percentage change in price causes a smaller percentage change in quantity demanded). Although imposition of taxes will increase the market price of alcohol, the change in demand would be substantially lower. Therefore the government would gain revenue, which it may use for provision of welfare. Secondly, alcohol is a demerit good. It has private benefits as an industry, and it provides utility and satisfaction to consumers. Its positive externalities include reducing coronary diseases, and providing amusement to others in social events. However, its negative externalities include addiction, drunken driving accidents and fights which result in property damage, and provide a burden to society. Its positive externality of preventing coronary diseases arises only from