Excises Tax on Alcohol - Absolute and Comparative Advantages

Question: Discuss about the Excises Tax on Alcohol, Absolute and Comparative Advantages. Answer: Introduction An excises tax on alcohol has been observed to reduce the number of binge drinkers in many economies. There is a high percentage of people especially the low-income earners who spend much of their income on alcohol. However, it is not effective in the achievement of this purpose. Argument Raising the tax on alcohol is not the best way to control the abuse of alcohol in the society. There are some better strategies that can be implemented to curb this situation. The reason being that when an additional tax is imposed on the producers or the sellers of alcohol, it adds to their production costs. Due to this addition, they are forced to raise alcohol prices by almost twice the increment in tax. When prices are raised by the producers, it enables them to raise high profits. The higher profit is generated at the cost of consumers paying high prices. This means that the whole burden of the tax increment is carried by the consumers. This leads to a loss in the social welfare. The abuse of alcohol means excessive drinking; some households consumes alcohol on a daily basis. To a person who is addicted to alcohol consumption, the additional tax will not have any influence on his demand. The price elasticity of his demand is low; he will consume the same quantity even with the high prices (Diaz, Chaloupka, Jernigan, 2015). Prices will have to be very high for it to induce such people to consume less. This will be achieved by sacrificing some other part of their income. The additional reduction in income contributes to people living at poverty levels. This money could otherwise be used in meeting some other needs of the households. This explains why there are some many children who fail to get sufficient education owing to irresponsible alcohol and drugs consumption by their parents or guardians. If the prices of legal alcohol is too high, most heavy drinkers will move to seeking satisfaction from illegal beer. The government would therefore not be able to raise the high intended tax and overconsumption will persist. The other negative effect of increased excises tax is that people will lose jobs as sellers cut some labor supply to lower their cost (Diaz, Chaloupka, Jernigan, 2015). Unemployment will be raised in the society. Stverak (2013) argued that the same way sugar is not taxed to cure diabetes, so cant alcohol be taxed to reduce its consumption. Conclusion The argument above confirms that additional tax on alcohol cannot reduce its abuse in the society. In fact, it is making the society worse off since there is a loss in the social welfare. The best strategy would be to create public awareness on the harmful effects of alcohol consumption accompanied by the government setting rules and regulations that limit the time that alcohol should be sold to the consumers. Any seller who is caught selling beyond or before the set limit should be fined dearly. The same case should also be applied to the consumers who are caught consuming alcohol at those off-limit hours, and also to those who loses control from excessive drinking. The households wont be able to stand the high fines and hence they will become more cautious when drinking. Part b Introduction Comparative and absolute advantage are terms used in international economics as an economic basis for trade (Prabhat, 2011). The arrival into a condition that incorporates each of these terms involves consideration of various aspects. Absolute advantage is a term used when fewer resources are used in the production of a good, while the comparative advantage is used when a lesser opportunity cost is used in the production of goods. These terms have some differences which will be discussed below. Differences Prabhat (2011) differentiated the two advantages by noting that, in absolute advantage, the trade isnt mutually beneficial, while it is in comparative advantage. Cost is the factor considered in determining the absolute advantage, while opportunity cost is the factor for the comparative advantage. A simple example can be used in the illustration of the difference between the comparative and the absolute advantage. Suppose there is a household who is employed and is a farmer. If he goes to work, his is paid $ 2000. However, he receives nothing if he doesnt report to work. On the other hand, this household is efficient in ploughing his farm; he only needs one day to plough his whole farm. Otherwise, he can hire someone at $ 500 to plough his land in two days. Thus, it can be concluded that the household has an absolute advantage in both reporting to work and in ploughing his farm. Nonetheless, he would still have to hire the ploughing service since, if he ploughed the farm himself, he would not earn the $ 2000 because he has to give up a day reporting to work. He would save the $ 500 he would have paid for the ploughing service, but lose $ 2000 for not reporting to work. He, therefore, would be $ 1500 worse off. The opportunity cost of the household for not reporting to work is $ 1500. This is because, if he reported to work and then hired the ploughing service, he would have net earnings of $ 1500. If the ploughing service is not hired, it will not earn the $ 500. However, it would have more time to plough other peoples farms. The ploughing service, therefore, has a comparative advantage over the household since its maximum opportunity cost of not being hired is only $ 500. Individuals and on international trade, voluntary exchange of goods and services is facilitated by the comparative advantage and not the absolute advantage (Sherman Hunt, 2008). While some individuals or countries in international trade may have an absolute advantage in everything, some other individuals or countries has a comparative advantage on some products and services (Lopus Willis, 2003). Trade is both present with both absolute and competitive advantage. An economy with an absolute advantage in several products may specialize in that which it has the highest advantage. On the other hand, a country with some comparative advantages can specialize in that with the highest advantage. This facilitates international trade. In fig A, both countries have an absolute advantage, country X in Good A and country Y in Good B. in fig B, both countries have a comparative advantage, country X in good A and country Y in good B. Conclusion Most countries absolute and comparative advantage differs in their production of specific goods and services. Due to this, these countries benefits from free trade with each other. Preserving of jobs is one of the specious grounds in which countries restrict free trade. The other factor is the issue of self-interested politicians. References Diaz, M., Chaloupka, F., Jernigan, D. (2015). The Effects of Alcohol Excise Tax Increases on Public Health and Safety in Texas. texansstandingtall.org. Retrieved 5 August 2016, from https://texansstandingtall.org/pdfs/15_Alcohol_ExciseReport.pdf Lopus, J. Willis, A. (2003). Economics in action. New York, N.Y.: National Council on Economic Education and Junior Achievement Japan. Prabhat, S. (2011). Difference between Absolute and Comparative Advantage. Difference Between. Retrieved 5 August 2016, from https://www.differencebetween.net/business/difference-between-absolute-and-comparative-advantage/. Sherman, H. Hunt, E. (2008). Economics. Armonk, N.Y.: M.E. Sharpe. Stverak, J. (2013). Taxes Are Not a Sober Response to Alcohol Abuse. US News World Report. Retrieved 5 August 2016, from https://www.usnews.com/opinion/articles/2013/09/18/alcohol-sin-taxes-are-bad-for-consumers-and-state-budgets