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This is an Australian news article that is explaining the specific tax that is put on alcoholic drinks. The specific tax is placed on a specific good or product and has a fixed amount for each unit sold, it is proportional to the quantity of a product sold regardless of the price.
The article is also about budget deficit. Budget deficit is an indicator of financial health in which expenditures exceed revenue. Budget deficit is caused when a government spends more than it collects in taxes, by increasing the tax on alcohol this could be a way towards fixing the budget deficit.
The primary aim of a tax is to gain additional revenue on demerit goods and can also be used to deter people from buying that particular good.
Alcohol is taxed specifically and indirectly. An Indirect tax is a tax levied on goods and services rather than on income or any profits and a specific tax is a tax that is a fixed amount for each unit of a good (or service) sold, such as pounds per kilogram. It is thus proportional to the particular quantity of a product sold, regardless of its price.
Figure 1 shows the original price of the a good before the tax increase has been added, it also shows what effect tax has and that it causes the supply curve to shift to the left. This means that there will be a new equilibrium price and a new equilibrium quantity. Therefore you can see that there is an increase in price and a decrease in quantity, this represents that less people will buy for the increased price but you make more money by tax on the remaining people.
Figure 2 is a more specific graph and the supply curve is steeper because alcohol on the whole is an inelastic good. There is a distinct difference in distance between Q1 and Q but not much change between P1 and P. The graph shows that alcohol is an inelastic good and what effect this has on P and Q.
If you look at both diagrams you can see that there is area labeled deadweight, this represents the deadweight loss due to taxation, this is because now that the tax has been implemented there are less mutually beneficial exchanges between consumers and producers. If buyers have lots of alternatives for a good with a new increase in tax, they will usually respond to a rise in price by cutting down on the amount of the product that they buy. If sellers easily can switch to producing other goods, or if they will respond to even a small reduction in payments by going out of business, then they will not accept a much lower price. This means that it would have a lower elasticity. One problem for consumers is that tax isn’t brand specific meaning that you can’t just swap brand when a tax increases the tax on the product you normally buy, you have to find a complete alternative (for example butter to margarine) or you can continue to pay for the good.“Increasing the price of alcohol, particularly cheap wine and cider, would boost tax revenue by 2.9bn Australian dollars annually and be a boon to public health” this means that by increasing alcohol tax you will find that it will stop some people from buying, the alcohol as it becomes expensive, but you make more money on the people that will continue to buy the product. This extra revenue can be used for many things such as research into the effect on the alcohol, as mentioned in the article. Later on in the article it goes on to say, “The extra tax revenue could be spent in the health system targeting chronic disease prevention and research” this supports the previous statement.
From looking at the figures given throughout the article it is clear that increasing alcohol tax would not only help balance budget deficit but it would also be the best and most effective way of decreasing alcohol consumption across the continent and would also reduce the harm done by alcohol on the whole. The government adds tax so that they can gain extra revenue and everybody else loses out. When a tax is introduced it sometimes has a negative effect on consumers and producers. It means that consumers pay more for the same products; some people won’t buy the product anymore meaning that the producers lose out as well.
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