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IBDP Economics HL

Microeconomics - Internal Assessment


Hong Kongs Wine Tax
Timothy Tan
Renaissance College

IBDP Economics HL
Microeconomics - Internal Assessment
Hong Kongs Wine Tax
A Report by Timothy Tan, Renaissance College

Alcohol consumption has increased in Hong Kong due to overseas students who brought in the
drinking culture, (Wei, 2014) and is causing negative externalities of consumption. Though
alcohol has benefits to health when consumed in small amounts, overconsumption of this demerit
good causes negative externalities on society.
Demerit goods are goods or services that are deemed socially undesirable, and are most likely
over-produced and over-consumed in a free market. They cause negative externalities, which are
harmful impacts on third parties resulting from economic choices.

Price of
Alcohol ($)

The Market for Alcohol in Hong Kong


(Overconsumption of Demerit Goods) (Fig. 1)

S = MSC = MPC
A: Social optimal

Negative
Externalities

B: Market Equilibrium

PM
B

PSOC

ABC: Welfare Loss

A
C

QSOC

QM

D = MSB

D = MPB
Quantity of Alcohol
(Litres per year)

Due to overconsumption of this demerit good, there is existence of negative externalities,


including increased burdens on public healthcare, and slower economic growth. Average alcohol
consumption has been increasing consistently each year from 2.6 litres in 2009 to 2.9 in
2012. (Wei, 2014) Marginal Social Benefits (MSB) are now less than Marginal Private Benefits
(MPB). The quantity of alcohol consumed (QM) is greater than the social optimal (QSOC), and the
price of the good (PM) exceeds the social optimal (PSOC) concurrently. There is welfare loss, as seen
in ABC, where Marginal Social Costs (MSC) are greater than Marginal Social Benefits (MSB).

IBDP Economics HL
Microeconomics - Internal Assessment
Hong Kongs Wine Tax
Timothy Tan
Renaissance College

Price of
Alcohol ($)

The Market for Alcohol in Hong Kong


(Overconsumption of Demerit Goods / Government Indirect Tax) (Fig. 2)

STAX

Wine Tax

PTAX

PSOC

A: Social optimal
B: Market Equilibrium

PM

S = MSC
= MPC

ABC: Welfare Loss


C
D = MSB

QSOC

QM

D = MPB
Quantity of Alcohol
(Litres per year)

In order to correct the market failure, the government desires to impose an indirect tax on alcohol
to curb Hong Kong binge drinking. (Wei, 2014) Indirect taxes are imposed on suppliers, to
lower the quantity supplied of particular goods and services.
As a result of the tax, supply will shift left from S to STAX, due to increased costs of production.
There is increased price from PM to PTAX. The quantity of alcohol consumed will decrease from QM
to QSOC, which is the social optimal.
A positive impact of the policy is increased stable government tax revenue. The habit forming
nature of alcohol means demand is price inelastic, where percentage decreases in quantity
demanded is proportionally smaller than percentage increases in price. The increased prices due
to indirect taxation will cause small changes to quantity demanded of alcohol, which implies
increased tax revenues, allowing investments in capital such as education, to improve skill levels
of Hong Kongs working population.
The policy presents possible problems. Firstly, reducing quantity consumed of habit forming
goods mean those with long-term addictions may suffer from withdrawal symptoms, decreasing
work efficiency and possibly causing slower economic growth. Consumers may also look for ways
around the policy, such as trading in underground alcohol markets, free from government
intervention. These factors suggest the policy may not be effective in the short term, and that the
government is assuming quantity consumed will decrease immediately after imposing the policy,
not recognising that factors like addiction and available private stocks mean externalities may not
be completely eliminated.
Secondly, the amount to be taxed is difficult to estimate. Though we know hospital admittances
due to alcohol induced problems has risen from two in every 100,000 in the age group in 2009

IBDP Economics HL
Microeconomics - Internal Assessment
Hong Kongs Wine Tax
Timothy Tan
Renaissance College

to 3.3 in 2012, (Wei, 2014) it is still difficult to ascribe a monetary value to the negative
externalities. Costs of healthcare, lack of productivity in the work place, and other unaccounted
factors lead to impacts that might exceed our abilities of estimation, so the market failure might
only be corrected to a certain degree. Otherwise, the tax will have to be extremely large, which
may create extra unnecessary burdens on consumers.
Thirdly, the suggested tax is a regressive tax, which is tax that demands an increasing percentage
of income as income level decreases. Individuals with any income all have to to be taxed the same
amount for purchasing alcohol, and therefore the tax takes a higher percentage of income from
low income individuals, increasing burdens on them and causing a widening wealth gap, which is
socially undesirable.
As an alternative, the government can convert increased tax revenue to investments in
advertisement of negative consequences of consuming alcohol, or setting regulations to restrict
alcohol consumption. These methods may shift demand to the left for the demerit good, but
since it is difficult to change consumer preferences and reach all audiences through advertisement
quickly, or to maintain regulations on a large scale with immediate notice, they are more suitable
as long term solutions.
The Hong Kong governments wine tax policy may not be ineffective in correcting the market
failure if imposed. Though it brings positive impacts such as increased tax revenue, the priority of
the policy is to correct market failure, which may only occur to a certain extent. However,
implementing other demand side policies as aforementioned can help better correct the market
failure.

Bibliography
Wei, L. (2014). Wine tax could be reintroduced to curb Hong Kongs binge drinking. Retrieved
http://www.scmp.com/news/hong-kong/article/1512953/officials-look-taxes-and-adscurb-binge-drinking?page=all (See Appendix 1)

IBDP Economics HL
Microeconomics - Internal Assessment
Hong Kongs Wine Tax
Timothy Tan
Renaissance College

Appendix 1
Wine tax could be reintroduced to curb Hong Kongs binge drinking. by Lo Wei, SCMP.

Health officials will look into controls on alcohol advertisements and a possible reintroduction of the wine tax to
combat growing consumption of alcohol, particularly among young people.
This follows a steady rise in consumption generally and a big increase in binge drinking among the young,
Centre for Health Protection consultant Dr Regina Ching Cheuk-tuen said yesterday.
"We should face up to the increasing trend," Ching said. "We have provided the data to related departments to
see whether a change in the [tax] policy is needed, while we monitor problems that arise from drinking."
The department would also gather information on alcohol advertisements and communicate with broadcast
regulators.
Hongkongers' average alcohol consumption has been increasing consistently each year from 2.6 litres in 2009 to
2.9 in 2012, measured in pure alcohol and calculated by dividing local alcohol production and net imports by the
total population.
Meanwhile, the percentage of people aged 18 to 24 engaged in binge drinking has risen each year - from 7.4 in
2010 to 9.8 in 2012, Health Department figures show.
And the rate of children aged under 18 admitted to hospital for alcohol-induced conditions increased from two
in every 100,000 in the age group in 2009 to 3.3 in 2012.
Ching, the centre's consultant for non-communicable diseases, said alcohol created health risks regardless of the
amount consumed. She said health officials had also been discussing alcohol issues with university
representatives in the past few months.
"We became aware that alcohol manufacturers are holding promotion activities on campuses and raised the
problem with universities," she said. "Both staff and students should know more about the harmful effects of
drinking."
Ching said many local students picked up the habit at university, from overseas students who brought in the
drinking culture.
University of Hong Kong research has shown the percentage of boys engaged in binge drinking rose from 11 per
cent in their first year of university to 21 per cent in their second year. The increase is more serious among girls from 2.8 to 7.9 per cent.
Binge drinking is defined as having drunk at least five glasses or cans of alcoholic drinks on one occasion in the
past month.
Hong Kong Paediatric Society president Dr Daniel Chiu Cheung-sing said alcoholic drinks should not be made
available to children and young people. Law enforcement should be tightened so that those under 18 are unable
to purchase alcohol, which they can do in convenience stores, he said. The city has become a global winetrading hub since a 40 per cent wine tax was abolished in 2008.