Mert Özenay

IB Economics HL / Internal Assesment

The Turkish government intervened into the alcoholic beverages

market with a new policy decision aiming to generate a special tax imposement for

alcohol consumption. This special tax imposement had drastic effects on the market,

where an interaction of consumers and producers takes place. Due to the special tax,

demand has contracted significantly, shifting the supply curve down as well. The

government decided to impose a tax for the producers of alcohol as a means of improving

the health of the citizens. The greatest tax was imposed in rakı. Hence, this tax had

negative economical consequences for most of the stakeholders in the sector. By

increasing the costs of production of rakı, the drink has become less affordable to

customers, dropping the demand of alcohol and increasing the price of rakı. Although

smaller compared to the real income of consumers, the revenue of producer firms have

declined, with the government receiving high tax revenue and the market scaling down.

With supply, the willingness and ability to produce a product at a given price in a

given time period, shifting from S to S1, there has been a new equilibrium reached in the

market. To add, the producer’s initial desire, to pass on all of the cost of the tax on the

consumer hasn’t been hold true as there had been an excess supply, with no demand at

the desired equilibrium. (Fig.2.1-EE) Therefore, the price has fallen until a new

equilibrium is reached at Fig2.1-E2.

Mert Özenay
IB Economics HL / Internal Assesment
The special tax imposition on a habit-forming good with a relatively inelastic

demand has left the consumers to undertake the bigger portion of the tax burden on their

side. The rise in price has contracted the supply curve to the left, only to mention that the

shift in the supply curve has been relatively smaller, since the good in question has a

relatively elastic supply, where the increase in price of rakı will result in relatively

smaller changes in the quantity of consumers in the rakı market. Of course, it is

imperative to note that there will still be consumers willing and able to pay the higher

price, although smaller in number. The supply will not shrink as much in the short run,

and there will still be suppliers at the new equilibrium price at S1. In the short run,

consumers will be unaware of the price changes and/or will be reluctant to change to

alternative alcoholic beverages. However, in the long run, the demand for rakı will fall, as

people will start to buy more affordable alcoholic drinks, changing their buying

consumptions with PED increasing. Therefore the PED, when measured over a longer

time period, will certainly be more elastic.

The sector representatives worry about an emergence of a black market where

unregistered sales and fake rakı are sold. The black market created will have the supply

curve shifting to the left (Figure 2.2) and the demand slightly shifting to the left. The

quantity consumed will decrease, while the price rises.

Mert Özenay
IB Economics HL / Internal Assesment
The black market will lower the efficiency of the policy and will not contribute to

the government revenue in any way. Rakı production (output) will be decreased, and the

costs will increase in which a decrease in productive efficiency will be seen. The

allocative efficiency, where there is maximum output, lowest cost and each rakı produced

is consumed will lower, as tastes and preferences will alter.

Since rakı is an inelastic good, the demand for production workers in the industry

will not fall significantly and government will utilize this as much as possible, owing to

the fact that this will not increase unemployment in the economy as the quantity

demanded for alcoholic beverages will not fall radically. This policy will be effective in

terms of employment. Government’s intervention is not sustainable; as a means to save

the national budget it penalizes both sides of the market (with consumers having smaller

incomes (experiencing a shift to the left for the demand curve, Figure2.3) and producers

gainining less revenue.)

This lose-lose situation will negatively affect the market, with the sector shrinking

and discouraging possible investors to step into rakı production. The policy will not be

sustainable, as it limits the economical growth and development of producers.