High taxes on alcoholic beverages lead to consumption of bootleg alcohol: CHP
CHP
Commentary:
In the past decade, the Turkish alcohol market has increased its excise duties by 240%-450%, to diminish the consumption of alcohol. The article above illustrates how these elevated indirect taxes lead to a rise in the consumption and supply of cheaper and higher-risk bootleg alcohol. Excise taxes are compulsory taxations imposed on demerit goods by the government to influence the market or create government revenue. In this case, they were imposed to reduce and pay for the negative externalities resulting from the consumption of alcohol. A key concept associated with this problem would be intervention.
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In economics, intervention refers to the idea of government involvement in markets. Governments may choose to intervene when markets fail to achieve certain societal goals. In this case, the government intervened to limit the negative consumption externalities of alcohol as they lead to an overallocation of resources which leads to allocative inefficiency. Negative consumption externalities arise when the consumption of demerit goods imposes external costs on third parties. Long-term externalities of alcohol consumption include an increased rate of crimes and accidents, addiction, social disorder, and various health-related problems.
Turkish alcohol market
Figure 1: Negative Consumption externality of Alcohol
In Figure 1, we can see how the marginal social benefit (MSB) curve lies below the marginal private benefit (MPB) curve as a result of the external costs caused by the consumption of alcohol. The market equilibrium; Qm and Pm is given by the intersection of the MPB and MPC curves, but the social optimum; Qopt and Qm, is determined by the intersection of the MSB and MSC curves. The graph also shows us how the market is over-allocating resources to the production of alcohol as Qm≻ Qopt and MSC≻MSB at Qm. The welfare loss is equal to the difference between MSC and MSB for the amount of output that is overproduced relative to the social optimum and it represents the reduction in societal benefits caused by the overproduction due to the externality. A tax would reduce the welfare loss by bringing down the quantity demanded and society would gain the benefits represented by the blue shaded area.
Turkish alcohol market after Indirect Tax
Figure 2: Turkish alcohol market after Indirect Tax
In figure 2, we can see how the indirect tax affects the alcohol market. The indirect tax shifts the supply curve upwards as the firm is now supplying less due to the higher price. The price being higher than Popt also earns the government tax revenue. Since alcohol is an addictive good and therefore inelastic, the change in quantity demanded is much smaller than price change. The consumer burden of tax is also relatively higher than the producer burden of tax as they now have to pay more for less. Due to the goods' inelastic nature, consumers rather turn to the illegal market than not purchasing it. On the other hand, the tax could discourage non-regular consumers from taking up the habit. Altogether, the tax did accomplish its main aim and reduce the welfare loss as the quantity after the tax is now closer to Qopt.
Regardless, the tax still has its flaws. A significant part of the new tax revenue would have to be spent regulating the black market and enforcing the policy, resulting in additional police and advertising costs. However, by investing in negative advertising and awareness campaigns, the government would be able to further decrease demand and get closer to the optimum level. This would have positive effects as once the optimum level is reached, the negative externalities are solved.
The government intervention is, therefore, not completely successful. In this case, the government has decreased demand but has also increased the demand for bootleg alcohol, increasing health care costs as a result.
Indirect taxes are a short-term solution but can cause long-term problems. This is because an indirect tax can temporarily reduce alcohol consumption, increase government revenue and diminish welfare loss. However, in the long term, people will not stop purchasing alcohol, especially those who are addicted to it, and will therefore turn to the black market. Once consumers switch suppliers, they will unlikely shift back as the black market most likely has a higher consumer surplus. The government is therefore faced with increased healthcare costs as methyl alcohol can lead to severe health problems. The increased deaths would consequently increase police fundings and advertising spendings.
Overall, we can say that the taxation in Turkey on alcohol is not effective but could be if it were to be accompanied by additional policies. The government implemented a new tax that reduced demand but created several other problems.
TItle of the article: High taxes on alcoholic beverages lead to consumption of bootleg alcohol: CHP
Source of the article: Hürriyet Daily News
https://www.hurriyetdailynews.com/high-taxes-on-alcoholic-beverages-lead-to-con sumption-of-bootleg-alcohol-chp-161189
Date the article was published: December 27 2020 14:01:00
Date the commentary was written: February 25
Word Count of the commentary: 765
Unit of the syllabus to which the article relates: Microeconomics
Key concept: Intervention
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