Government intervention in Pricing (Essay Sample)

Government intervention in pricing
Name
[Institutional affiliation]
a)
Fig1: Demand curve
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Fig2: Supply curve
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As shown in figure 1. Demand curves are used to reflect the relationship between prices of commodities and the quantities that are demanded at the given prices. By graphing the demand schedule one gets a demand curve. Demand curves for all consumers together will be similar to that of each consumer, i.e. the total of all the individual demands at different prices.
IPOLLITO (2005, pp.127-134) states that Demand curves are useful in estimation of various behaviors in competitive markets, when combined with supply curves they will give the equilibrium price for markets, which is also known as the clearing price. Combining the two curves will give the equilibrium quantity which is the quantity that producers will produce for the consumers to buy without creating a surplus.
There are various factors that affect the consumption behavior of consumers. One the most influential ones is the price of commodities which is affected by various factors including cost of inputs and government policy. In This case, there are 24 brands of liquor in the Scottish market and the government wants to control their consumption by altering price to at least 50p per unit. After the new law is implemented, there is increase in the prices of 14 brands and this is likely to reduce their consumption.
As shown in figure 2, the supply is directly influenced by prices of commodities. There are various factors that affect the prices of commodities and these include government policy and increase in production costs. In this case, the government directs that the price of liquor be above 50p per unit. The move is meant to discourage the buyers from buying liquor, however, the prices of 14 out of the 24 liquors goes up. This is likely to reduce demand and result in reduced production.
b)
According to HIRSCHEY (2009, pp.419) there are three ways that the government can influences the prices of products, keeping it constant, increasing it or reducing it. When they set prices lower than they are, then various resources including talent and capital from investors will move from the industry to another where there will be better returns. When the prices are increased, the suppliers will be willing to produce more of their products. However, increase in prices reduces the demand for commodities especially if they are not basic needs.
In this case, the product in question is beer and the consumers will get discouraged by the increase in prices. After the Scottish government set prices above 50p per unit, 14 brands of liquor will have to increase their prices while the remaining 10brands will remain the same because they are already above the set prices. This means many people will be forced to take less beer that they used to due to the high prices.
The ten brands whose prices are already above the set 50 p per unit are likely to gain in that their royal customers will still remain unaffected and thus are not likely to defect to consuming other brands. The 14 brands whose price is below 50p per unit will lose their customers or experience reduced sales since most of their potential customers will be forced to limit their drinking or completely quit drinking.
The potential gains will not exceed losses because most of the population is low and middle class which means they consume less expensive liquor. Since there are only 10 liquors that will not have to increase their prices, it implies that the 14 who will have to increase their prices. The total overall effect will be reduced drinking and profits realized which is due to reduced drinking.
c)
107442046228000Fig3: Demand curve
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30924514605000Fig4: Supply curve
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LIPSEY (2011, pp.308) states that per unit tax can also be referred to as specific tax, this tax is charged in fixed amounts for each unit that is sold out not minding the price of a commodity. This tax is a proportion on the price of a commodity without minding what the price is. Examples of unit taxes are excise taxes and ad valorem taxes which are charged as fixed percentage of the value of a product. These taxes can only be applied when the quantities of prices being sold are measurable.
In our case we have beers and these are obviously measurable, this means administering per unit taxes will be very easy. The tax can be levied on buyers of one seller; if it is levied on buyers then the demand curve will shift outward as indicated in figure 3. If the per unit tax is levied on a supplier the supply curve will shift inwards as indicated in figure 4.
Per unit tax charged on beer will increase the price of beer in Scotland since all beers will increase by a similar amount. Increasing the price of beer will reduce its demand and reduce sales. The suppliers are likely to respond to the reduced demand for beer by reducing production accordingly otherwise their commodities will flood the stores and create huge losses.
However, increased prices are not likely to affect the consumption of beer as such since it is an addictive commodity. Many of the consumers may decide to reduce expenditure on other products and use the money on beer. That is why careful measures should be taken to ensure there is reduced consumption other than just increasing the price.d)
The only party who will gain from the taxes is the government. It is likely to hurt the manufacturers that will most likely reduce their production due to reduced demand. This may in the long run result in reduced tax revenue to the government which will be a negative effect on the government. However, since the government is interested in discouraging drinking this will be to their advantage. On the other end, the drinkers may opt to cut down their spending on other items and use the money in drinking because alcohol is highly addictive.
MANKIW (2011, pp.124) states that both the buyers and the sellers share the burden of tax. What differs is who sends taxes to the government.
For the producers, it will negatively affect them since they will realize reduced sales and profits in turn. On the other end, if a large portion of the consumers is addicted to drinking then they will realize more revenue because they will be selling at a higher price. This may not be the case for the 14 beers whose prices will increase since some of their customers may decide to switch to drinking the highly priced beer. For the producers whose prices will not be affected it will be their advantage ...