ACJC H1 ECONS P1 Qn3

3 (a) Explain the demand and supply factors that affect the price of alcohol. [10] (b) Discuss the view that governments should ban the consumption of alcohol. [15] a) Explain the demand and supply factors that affect the price of alcohol. [10] Suggested Approach Introduction  Acknowledge that prices are determined by forces of demand and supply  Identify the possible demand and supply factors that could affect the price of alcohol  Different types of alcohol i.e wine, beer, hard liquor Body (STUDENTS SHOULD SELECT THE MORE APPROPRIATE FACTORS WHICH ARE APPLICABLE TO ALCOHOL) Demand factors a) Taste & preferences  Due to strong marketing efforts and innovative marketing campaigns to promote the consumption of various alcoholic drinks, this has resulted in an increase in demand for alcohol.  For e.g in 2016, leading players such as Asia Pacific Breweries Ltd launched innova tive marketing campaigns to create excitement amongst consumers, tapping into the use of culture and food pairing. For instance, Tiger beer conducted a marketing campaign entitled uncagestreetfood to celebrate the local street food culture. Through a serie s of hawker dining events, consumers were able to pair their local food with the brand. This has resulted in an increase in demand for alcohol. b) Household income  Due to growing affluence, more people are willing and able to spend more on luxury items such as wine, thus resulting in an increase in demand for alcohol. However, for alcoholic drinks such as beer could be seen as an inferior good. Hence when there is an increase in income, there will be a fall in demand for beer.  Likewise, when there is poor economic outlook, consumers show more discretion in their spending and cut down on their demand for alcohol such as wine.  For e.g there is a slowdown in growth in t otal volume of alcoholic drinks sold in Singapore 2016 due to pessimistic consumer sentiments. Supply factors a) Government policy  Due to government policy such as taxes on alcohol producers, this has increased their cost of production thus causing supply to decrease. This is seen in Singapore where it raised excise duties on alcohol by 25%.

b) Increase in number of producers  Due to lower barriers to entry into the market for alcohol due to new distribution channels such as online shopping, this has led to an increase in supply of alcohol as these products are becoming more readily accessible to consumers. For instance, the num ber of internet wine retailers such as Vinomofo is increasing due to the lower set -up and operating cost. Moreover, internet retailers are importi ng a wider range of wine brands, thus increasing supply of alcohol. Putting supply and demand factors together  In terms of supply, the implementation of a large amount of taxes is likely to outweigh the entry of new producers, causing supply for alcohol to decrease.  Hence the increase in demand and decrease in supply is likely to lead to an increase in prices. This will lead to a shortage of alcohol. This shortage will put an upward pressure on the price of alcohol, causing price of alcohol to increase. Level Descriptors for Essay Question 3(a) Marks L3  Well-developed explanation of both demand and supply factors affecting price of alcohol  Use of adjustment process to explain the change in price.  Answer supported by examples and well-contextulised to market for alcohol 8-10 L2  Undeveloped explanation of demand and supply factors that affected price of alcohol  OR  Developed explanation of demand or supply factors affecting price of alcohol  Limited use of examples. 5-7 L1  Mostly irrelevant  Theoretical answer without contextualising to market for alcohol  Conceptual inaccuracies.  Mere listing of factors 1-4 b) Discuss the view that governments should ban the consumption of alcohol. [15] Suggested Approach Candidates are required to explain why there is a need for governments to intervene through the imposition of a ban by explaining the market failure due to presence of negative externalities in the market for alcohol. Candidates are then required to explain how the ban of consumption of alcohol can help to reduce the market failure and evaluate its effectiveness and if the government should implement other measures instead. Development of ideas Thesis: Governments should consider banning consumption of alcohol.  Explain reasons for government intervention in the market for alcohol

Consumers of alcohol will only consider their marginal private cost (MPC) and marginal private benefit (MPB) in consuming alcohol. The private cost of alcohol consumption includes the price of alcohol while the private benefit includes the satisfaction from consuming alcohol, such as being able to de- stress. If left to the free market, consumers would be consuming up to the quantity where their MPB equates MPC at Qe, as shown in Fig 1 below. In addition, there are also negative externalities associated with alcohol consumption. Examples of the external cost are the harm/violence towards the surrounding members of the public as the drinkers become easily aggravated and lost control of themselves. The surrounding members of the public may need to bear treatment cost as a result of the assault. In addition, when those who drink drive, their negligence may result in accidents; even fatal ones, as stated in the preamble. The cost inflicted on other road users or pedestrians are the treatment cost or even cost associated with loss of lives. Due to the presence of external costs, there is a divergence between marginal social cost (MSC) and marginal private cost (MPC). At the level of consumption in the free market, the marginal social cost is greater than MSB. Society values an additional unit of alcohol less than what it costs society to consume it. The socially optimum level of consumption is at Qs, where MSB=MSC. There’s therefore a situation of over-consumption, resulting in a deadweight loss as shown by the shaded area. Society’s welfare is not maximised at Qe. There’s a need to allocate less resource to the consumption of alcohol until the socially optimum level of consumption could be attained at Qs. There’s a need for the government to intervene to ensure this outcome. Transition: One form of regulation is to ban alcohol consumption. This, however, should be considered for implementation only if it improves societal welfare.  Explain how a ban on consumption of alcohol will lead to an efficient allocation of resources A complete ban on consumption of alcohol will reduce consumption of alcohol to zero. This will lead to an efficient allocation of resources if the socially optimal quantity of consumption Fig 1 MSC MPC MPB = MSB Quantity of alcohol Cost/Benefit Qe Qs A B C D F

is at zero as well. This will directly restrict the access of alcohol to consumers and reduces the external cost on members of the public. An example is seen in a prohibition law in Bihar, one of India’s poorest, most agrarian states. The law imposes a maximum sentences of seven years for drinking alcohol and life in prison for making it. This has resulted in crime rates to have fallen sharply, reducing the negative externalities. In addition, if the extent of external cost is large, it is administratively easier to just ban the activity to reduce market failure. Anti-thesis: Government should not completely ban the consumption of alcohol.  Argument 1: Explain why a complete ban on consumption of alcohol may not lead to an efficient allocation of resources (i) Underconsumption in the market for alcohol  With reference to Fig 1, the welfare loss as a result of the decision of consumer is given by area ABC. Banning alcohol consumption will reduce the level of consumption to zero. However, for units up to