Economic Tools: The Alcohol Abuse Problem Solving

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Table of Contents

Introduction
Possible solutions
Effects of prescription drugs’ demand on the demand of other products
Elasticity of demand
Increasing costs industry
Perfectly competitive markets
References

Introduction

Alcohol abuse has two responses to unemployment. Those who have been laid off, have a tendency of abusing alcohol while those who remain employed reduce their alcohol consumption because they are aware that alcohol abusers are more likely to be laid off when the workforce is to be reduced (Booth, 2004). However, unemployment cannot be used to control alcohol abuse. According to VanBaren (2012), the four elements of Economics include scarcity, opportunity cost, inflation, supply and demand. Scarcity describes the situation where “people’s wants typically exceed their means” (VanBaren, 2012 para. 1).

Opportunity cost refers to other options people forego by making a choice. Inflation affects the choices by reducing the number of goods that people can purchase. This occurs when the inflation rate is higher than the rate at which an income increases. The four elements of an economic way of thinking are the use of assumptions, isolating variables, thinking at the margin, and the response of rational people to incentives (O’Sullivan, Sheffrin, & Perez, 2007).

Possible solutions

Alcohol abuse can be reduced by increasing its price. Chaloupka, Grossman & Saffer (n.d) agree on a research which concluded that “increase in the prices of alcoholic beverages lead to reductions in drinking and heavy drinking as well as in the consequences of alcohol use and abuse” (p. 22). The price of alcoholic drinks can be raised by imposing higher taxes per unit of production. The problem with alcoholic beverages is that it has been a long period since the taxes were increased. Due to inflation the real value of the increased taxes on alcoholic products has been lost. According to Chaloupka, Grossman & Saffer (n.d), the real price of distilled spirits fell by 32%, and that of beer by 20% between 1875 and 1990.

However, those in authority are not quick to add taxes that reduce consumption because it would hinder consumption of the abuser as well as the moderate drinker. Beer is considered the alcohol of choice by the American youth. Different states excise various taxes on beer to reduce its consumption. The price elasticity of alcohol in the U.S. is -0.5. This means that “a 10% increase in price would reduce consumption by 5%” (Chaloupka, Grossman & Saffer, n.d. p. 23). Beer consumption in the U.S. is considered inelastic compared to wine, and distilled spirits. The elasticities are -0.3, -1.0, and -1.5 for beer, wine, and spirits respectively. An economist would reduce the demand of alcohol by increasing its price.

Another method that can be used to reduce alcohol abuse is reducing supply. This can be done by reducing entry into the alcoholic beverage production industry. This can include the amount required to obtain license for production. Limiting supply would make the demand exceed supply in the short-run. Prices would increase because the licensing fee was high, and because demand exceeds supply. The market mechanism would set a price higher to most alcoholic abusers.

According to White, White & Korgen (2011), the assumption giving out information that“alcohol consumption has increased” tends to increase consumption is untrue. They also think the assumption that “alcohol advertisements increase alcohol consumption” could be misleading to remedial policies (White, White & Korgen, 2011 p. 96). In this case, the most effective way of dealing with alcohol abuse is making people aware of its opportunity cost. Alcohol abuse reduces productivity of an individual, and creates social problems.

Effects of prescription drugs’ demand on the demand of other products

Prescription of drugs are essential and for this reason they are considered inelastic to price changes. According to Hatten (2012), when it comes to prescription drugs “a change in price will have little effect on the quantity you demand” (p. 342). However, the household income is the same value that is used to demand other products. When households demand better health care because of an increase in their income, an increase in the demand for prescription drugs would not reduce the demand of other products. When there is an increase in prescription drugs with the same purchasing power, then those commodities that are not necessities will be less preferred. Prescription drugs may be a necessity but as studied by Rosenthal, et al. (2003), increase in consumer-directed promotion results in an increase in the demand for prescription drugs.

Elasticity of demand

Elasticity of demand refers to situations when demand responds to changes in price. When the supply is low, people are willing to pay more for a demand-elastic product. However, they cannot consume the same level as when prices are low. According to Hatten (2012), for a product with elastic demand such as computer software “a decrease in price will cause an increase in demand” (p. 341). When demand is elastic, the increase in price will go back to the equilibrium price through the market mechanism.

Elasticity of supply applies when supply can be shifted to meet changes in consumer demand. Price elasticity of demand measures “how responsive producers are to a price change” ( McEachern, 2011p. 109). The supply of some products is only elastic in the long-term. They are considered to be inelastic to demand. These products will have a higher price if consumer preferences create a higher demand. Such a product is milk. The production of milk will not be altered by a large margin until there is an increase in dairy cattle. The production of soft drinks could take the option of increasing the number of hours that the machines run. When this reaches 24 hours a day, then expansion of the facility is necessary. To perfectly inelastic supply industry such as diamond mining, there will be no change in supply despite changes in price (McEachern, 2011).

Increasing costs industry

An increasing cost industry is one which has its marginal costs and average total costs increasing when they increase the level of output. According to McEachern (2011), it is necessary for such firms to “bid up the prices of some resources or otherwise increase per unit cost, and each higher costs shift up each firm’s cost curves” (p. 190). An example of a firm with increasing costs as a result of expansion is oil drilling companies. The increase is through the cost of drilling rigs, and the workforce.

Perfectly competitive markets

A perfectly competitive market is preferred because it creates a situation where it is free to enter business and to take an exit. According to Carbaugh (2011), firms that operate under perfectly competitive markets “operate at the lowest price possible, charge the lowest cost, that they can without going out of business, and earn no economic profit” (p. 103). The firms in this case use the most efficient methods to lower cost. Those that have inefficient procedures run out of business.

References

Booth, E.D. (2004). Hooked on Growth: Economic Addictions and the Environment. Maryland, USA: Rowman & Littlefield Publishers.

Carbaugh, J. R. (2011). Contemporary Economics: An Applications Approach. New York, U.S.A.: M.E. Sharpe.

Chaloupka, J. F., Grossman, M. & Saffer, H. (n.d). The Effects of Price on Alcohol Consumption and Alcohol-Related Problems. Rockville, U.S.A.: National Institute on Alcohol and Alcoholism Publications. 2012. Web.

McEachern, A. W. (2011). Economics: A Contemporary Introduction. Mason, U.S.A.: Cengage Learning.

Hatten, S. T. (2012) Small Business Management: Enterpreneurship and Beyond. Mason, U.S.A.: Cengage Learning.

O’Sullivan, Sheffrin, & Perez. (2007). Survey of Economics: Principles, Application, and Tools. Pearson/ Prentice Hall. Web.

Rosenthal, B. M., et al. (2003). Demand Effects of Recent Changes in Prescription Drug Promotion. National Bureau of Economic Research. Web.

VanBaren, J. (2012). Four Elements of Economics. Web.

White, K. S., White, M. J. & Korgen, O. K. (2011). Sociologists in Action: Sociology, Social Change, and Social Justice. California, U.S.A: Pine Forge Press.

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