• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Mircoeconomics Analysis of the Budget 2012: Tobacco and alcohol duties rise.

Extracts from this document...

Introduction

Anna-Maria Riemer Budget 2012: Tobacco and alcohol duties rise The consumption of alcohol and tobacco has for some time been a major issue that has been problematic to many governments. In order to decrease the consumption of these goods the UK government has decided to increase taxes on tobacco and alcohol which would increase the costs and price of those goods, making them more expensive and thus less attractive to consumers. The article Budget 2012: Tobacco and alcohol duties rise states that ?Smokers can expect to pay substantially more for a pack of cigarettes and the duty on alcohol will rise 2% above the rate of inflation?. The government wants to do that because cigarettes and alcohol are both unhealthy and damaging, not only to the consumer himself but also to third parties. Such goods are known as demerit goods, which are goods that are considered damaging or harmful in anyway. As the government increases taxes, thereby increasing prices, the demand for that good should fall, since the law of demand states that price and demand have an inverse relationship. ...read more.

Middle

This shift in supply leads to an increase in price from P to P1, and, the good having inelastic demand, a decrease in quantity demanded less than proportionally from Q to Q1. This allows governments to tax such goods very heavily, and get a lot of revenue from it, but still the quantity demanded does not fall by too much. In the case of cigarettes and alcohol this is a problem, since even though prices rise people still keep consuming it, due to addiction. Therefore, government taxations are not really working for these goods, and they should consider other options such as banning of this products or negative advertising. Nevertheless, in this particular case, the article states that the major increase in prices ?5 % above inflation for tobacco? has lead to a decrease in. The Chancellor George Osborne said that "There is clear evidence that increasing the cost of tobacco encourages smokers to quit and discourages young people from taking it up," and also pub chains complain that they now have less people buying alcohol, since the price has so drastically increased and ?the British people are now paying 40% of all the alcohol duties in Europe?. ...read more.

Conclusion

In this case, they would be able to this by focusing more on aggressive advertising campaigns, highlighting the dangers of excessive cigarette and alcohol consumption. The advertising should raise awareness and therefore reduce demand, which would result in the MPB moving towards the MSB. This would ensure the consumption of cigarettes will reach the Socially Optimal Point, where the Marginal Social Cost equals the Marginal Social Benefit (MSC=MSB). This is a positive effect, since at this point social economic welfare is maximized. In conclusion, even though it is difficult to fully stop consumption of demerit goods such as alcohol and tobacco, the article shows that a major increase in taxes makes it possible to reduce it. However, as illustrated in the diagrams, no matter by how much the government increases taxes consumption of alcohol and cigarettes will fall less than proportionally, since they are inelastic goods. Also, if they keep rising the taxes an increase in black market activity might occur. Therefore, the government should approach different measures to reduce the consumption of said goods. For example, they could use tax revenue for heavy negative advertising and education to scare people away from consuming these products. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Market Failure IA Commentary. This article is about the price of cigarettes in Macao ...

    To improve the situation, the government is imposing a raise in the tax of tobacco from "MOP 4 to MOP 6". The cause of a tax being imposed on the firm producing the good (tobacco) that has the negative consumption externality will result in a decrease in supply and an

  2. An analysis of Why Economic Sanctions are bad. Quotes and argument.

    Possible Rebuttal: Alternatives to Economic Sanctions: In contrast to economic sanctions, which are intended to penalize a target country financially, non-economic sanctions are aimed at denying legitimacy or prestige. Although the following list is not exhaustive, non-economic sanctions include: * Canceling ministerial and summit meetings with a target country; *

  1. Smoking in the UK - economic analysis of its costs.

    It is not only passive smoker easier than the smoker to get decease; it is also influence the later generations. According to an article Smoking in Public place (2003)

  2. An analysis of why economic sanctions are good

    The country you are going to attack needs to have done something serious to be able to justify an attack. Even if it is justifiable there are problems. Military action relies upon your country being powerful and being able to engage in military action - whereas anyone can implement some form of sanctions - and it is very costly.

  1. Imperial Tobacco predicts 3% revenue rise

    UBS argued that Imperial was running out of cost savings from its purchase in 2008 of Altadis and remained hamstrung by debt. Shares in Imperial rose 32p on Wednesday to close at �19.25. Chas Manso, analyst at Evolution Securities, said the statement was welcome after a string of negative news:

  2. The structure of the EU budget and its allocation

    Commitment appropriations were set at EUR 138 564 million, 1.5 % higher than the 2009 budget, and equivalent to 1.17 % of GNI. The level of payment appropriations proposed increased by 5.3 %, to a total of EUR 122 322 million, or 1.03 % of GNI.

  1. The Benefits of Microcredit to Bangladesh

    Positive impact on the families: Independent studies show that micro credit has a host of positive impacts on the families that receive it. A recent world bank study by Shahid Khondkar (2003) show that micro-credit programs operating in Bangladesh over a long period of time have produced a greater impact

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    Other countries responded in creating their own tariffs, which cut off international trade and resulted in a worsening of economic conditions through exposure to American prices. The financial crisis of 2009 was considered to be one of America?s worst recessions since that of the Great Depression.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work