Article
2:
Price burden of beer
falls on the consumers’
Microeconomics
is the study of decisions made by individuals and firms and how it affects the
economy. Microeconomics for individuals is focused on how to maximize their
satisfaction and utility and for the firms profit maximization and cost minimization.
Everything in an economy is taxed from what you earn to what a firm produces and
sells there is some amount which is compulsory for all individual, households
or firms to pay. An example for taxation on an individual would be the income
tax they have to pay from what they earn and for a firm would be the sales tax
they have to pay with every unit sold in the market. A government can put tax
on goods for various reasons. Firstly, they can impose business taxes such as
excise duty, sales tax, wholesale taxes etc.Secondly, the tax can be imposed on
an individual or firm which is causing an externality; negatively affecting a
third party. For example, they might increase the tax on goods like alcohol and
cigarettes to reduce the consumption because of the bad effects it has on health.
Taxation being a subtopic of microeconomics I am going to analyze an incidence
of tax situation.
Here,
the US has imposed tax on the beer, an increase of excise duty, federal tax and
wholesale taxes etc probably to reduce its consumption. This increase in tax
has had direct effect on the price of the beer which has obviously increased.
Out of a dollar spent in the consumption of beer 36 cent is part of the federal
and business taxes.
This
phenomenon is about tax incidence: how an increase in tax causes the burden to
be shared by both the buyers and sellers. In this case the increase in tax has
caused the incidence of tax to fall by a huge amount on the consumers.
According to the article out of $44 billion tax revenue $10.8 billion is paid
by the customers. This is a hypothetical example of an increase of price burden
falling on the buyers. The supply here shown by S and the tax paid by the
consumers increases by $1.50 which makes the demand decrease to D-tax on
buyers. The price received by the sellers is $2.50 this has raised the price
paid by the buyers by less than the tax and lowers the price received by the
seller. Hence, they share a burden of tax.
For
people who can afford it beer seems to be a normal good to majority of people in
the USA as the article states that an average earning American must “work at
least the amount of time to buy a beer”. For some who need a can of beer to
quench their thirst or lower their work stress beer would be a necessity good. Any
consumer will be directly affected by an increase in the price of the good
which they enjoy indulging in and in this case USA being ranked 13th
in the world in terms of beer consumption it might be a habit too for some
people. If this is the case then beer has more or less an inelastic demand:
quantity demanded changes by little bit with a price change. Here because the
consumption of beer is a necessity rather than a luxury a little change in
price doesn’t have much effect on the demand. For example, initially at price
$2 100 units was being demanded however, as the tax increased the supply
decreased and the burden of tax per can was 20 cents which had to be paid by
the consumers.
Is
the price elasticity of demand the only factor determining whether the tax
burden falls on the buyers or the sellers? The answer would be it depends on
the price elasticity of supply as well. If for instance the beer has a
perfectly elastic supply and was sold at $1 per can. The graph below shows that
when the tax on beer is increased then the price of the beer becomes $1.50 and
the supply increased hence shifts upwards. The demand curves cuts the new
supply curve and the point there determines how much the overall tax shared by
the buyers and the sellers.
In
addition because Americans are unlikely to be affected by the price hike the
demand in this case might more or less remain the same.Becuase the price is
increasing the suppliers might see increase in their total revenue.
If
taxes on beer were imposed on countries unlike the USA where people do not earn
enough to afford a beer, would it have a huge impact on the consumers? An
increase in price would make people look for cheaper substitutes, depend more
on imports and find illegal ways to obtain it. If this was the case then the
demand for beer would be an elastic one. A change in price has a more than
proportionate change in quantity demanded. People might shift towards other,
cheaper alcohol which gives them a similar satisfaction. Also; this might
motivate people to find illegal ways to get cheaper and low quality beer. In Myanmar
illegal imports are cheaper in the market than domestic beers which have caused
the economy to lose nearly $27 million per year because the imports are not
taxed properly. In addition, in the UK when the taxes kept the price
increasing it made at least 12 pubs
close every week as people preferred to buy other cheaper alcohol and buy one
get one free deals found in the supermarkets than going to a pub. Furthermore,
people might stop consuming domestic beer and shift to imported ones. If people
consume a lot of imported goods then the government has to pay a high amount of
money to the country where the beer has been imported from. This will have an
adverse effect on the economy because there will be an out flow of money which
can’t be good for any country as it will result in deficits if the imports are
greater than the exports.
In
conclusion, a government imposes tax on goods such as beer, other alcohol and
cigarettes to reduce its consumption because of the health hazards it has on
the people. The price increase affects people’s consumption pattern. This summarizes
how the incidence of tax can either fall on the buyers or the sellers depending
on what kind of elasticity the good has on the demand as well as supply side
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