Sin Tax Error - the Economist.com
In Russia, half of premature deaths are linked to drinking. For this reason, the Russian government wants to reduce the demand for alcohol by setting a tax on beer. This means that the government puts a fee charge on beer. It is expected to reduce the amount of beer consumed in favor of an increase in consumption of vodka. Already this year, Carlsberg has suffered a 10% drop in the consumption of its beer. The assumption is being made that due to the higher price, the demand will decrease by a further 25-35% in year 2012. Although the reasons given for the tax increase on beer are related to health, the change will have the effect, that Russians will rather drink vodka.
This extract mainly talks about demand, supply, PED, substitutes and government taxing. Before taxing a product, the demand and supply of beer is in equilibrium. This means that the quantity demanded equals the quantity supplied also known as "a state of rest".
However, when a product is taxed higher (e.g. beer) the price will increase and the supply curve shifts to the left. Supply depends on the willingness and ability of producers to produce their product at a given price in a certain amount of time. Due to the tax on elastic good (a good for which consumer's responsiveness is high), the quantity demanded decreases. Quantity demanded defines the willingness and ability of consumers to buy a good or service. When a good is elastic, the PED is greater than 1. PED is the measure of responsiveness of consumers in a change in price for a good or service. Therefore the price for an elastic good cannot be at the maximum since the consumption of the good would decrease. Elastic goods often have substitutes.
In this article the government of Russia sets a tax on beer. Since the assumption is being made that the price will increase by about 25% and therefore the quantity demanded for beer will decrease by about 30% over the next 3 years due to the sin tax on beer; PED can be calculated. The general formula for PED:
PED = % change in quantity demanded / % change in price
PED = -30/25 = 6/5 = 1.2
Given that PED of beer is 1.2, it is an elastic good. The Diagram on the right represents the beer market. The Demand and Supply curve mark the equilibrium (Pe/Qe). As soon as the beer is being taxed more, the supply curve shifts to the left (Stax). This indicates the decrease in quantity demanded since the price of beer increases (price increased from Pe to Ptax and quantity demanded decreased from Qe to Qtax). The yellow marked area symbolizes the producer burden; the green shaded area is the consumer burden. Since the consumer is responsive to an increase in costs, the producers have to cover most of the cost. Otherwise the consumers would not buy the goods. The Diagram also shows a big area of dead weight loss (red shaded). Consequently it shows how the producers suffer under the beer tax since they have to cover most of the government imposed costs even though some don't earn enough money to do so.
Since vodka is also alcohol, it is a substitute for beer. Since the tax on vodka is unchanged people rather buy vodka instead of beer. This leads to an increase in the vodka market, illustrated by the Diagram on the left. "D" demonstrates the original demand curve with the price and quantity demanded. However, since only beer is being taxed higher, the demand for vodka rises (Q2). However to be in equilibrium, the price of vodka rises to (P1/ Q1). Hence the demand curve shifts to the right due to the increase of quantity demanded (Q to Q₁). So while the beer market suffers under the sin tax of beer the vodka market makes an enormous profit.
In the article it says "The government claims that the measure will raise money to fight the ravages of alcohol in a land where half of premature deaths are linked to drink." In my opinion, setting a tax on beer is not beneficial. On one hand, taxing alcohol is a good idea; on the other hand, taxing beer alone does not help to reduce the consumption of alcohol. Instead of taxing only beer, which does not have a high percentage of alcohol, the government should tax drinks, which have a much higher percentage of alcohol, such as vodka or whisky. If vodka or a similar drink would be more expensive due to taxes then there is a higher possibility for less drinking in the name of public health. I agree with the statement "Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka or dodgy but cheap home-made spirits than to convince them to give up booze altogether."
