BEA683 Economics for Managers: Research Project Alcopops Tax

Student Name: Student ID: Lecturer: Due Date:

Cong Thanh Luu 112318 Miss Cherie Moore Tuesday, 24th January, 2012

BEA683 Economis for Managers Research Project Alcopops Industry Overview

Alcopops, also known as ready-to-drink(RTDs) or pre-mixed drinks, are pre-packaged alcoholic beverage with the percent of alcohol varies from 4% to 8% for the premiumor super-strength alcopops (Drug Info, 2008). Alcopops are reported to be the most popular among 12-16 years old, account for 46 percent compared with 20 percent popularity in over 18s (Australin Division of General Practice 2003). As alcohol taste is masked by adding milk, fruit juice or carbonated water, it is more attractive to young people who are not interested in the bitter or astringent taste of alcohol (Munro, Learmonth, 2004). As a result, many young people cannot detect the taste of alcohol with either sweet mixes when drinking, leading to the larger consumption than they would. The research from Standing Committee in Community Affairs in 2008 stated that 39% of young people from 18 to 19 years old thought the RTDs does not contain alcohol. This misconception results in lots of social and economic consequences.

Arguments of the social and economic consequences on imposing alcopops tax

As the alcopops consumption increased continuously over the years, especially for female drinkers, the female drinkers aged from 15-17 years raised from 14 percent in 2000 to 60 percent in 2004 (King et al 2005). In April 2008, an increase in tax was passed on alcopops, raising the tax rate of RTDs in line with rate of the full strength beer. This tax was passed in order to make RTDs less affordable to young people and lower the underage binge drinking. However, there are opposition arguments on implementing alcopops tax. People who advocate the implement of alcopops tax argued that the amount of RTDs consumption decreased significantly of 30.2 percent (from 18.7 million litres in 2007-2008 to 13.1 million litres in 2008-2009) (Australian Bureau of Statistics 2010). This drop in RTDs consumption also cut down the alcohol-related harm to society such as health effects, social crime and traffic accidents. On the other hand, those who go against the implementing of alcopops tax debate that alcopops tax did not effectively reduce the alcohol consumption, but just a tool to raise the government revenue from RTDs and alcohol product. As levying tax on alcopops, the young

Cong Thanh Luu -- 112318

Page 1

BEA683 Economis for Managers Research Project

people who are over 18 can find substitutes such as beers and wines. Though there was a significant drop in alcopops, there was a raise in beers and spirits (ABS 2010)

Spirits

RTDs

Figure 1: Apparent Consumption of Pure Alcohol, per capita (ABS 2010)

Cong Thanh Luu -- 112318

Page 2

BEA683 Economis for Managers Research Project Theoretical effects on market

As the alcohol industry is assumed to face no other tax, the effects of alcopops tax are described in the following diagram.
P($)

S+t CS S
DWL

Pb P* TR Ps

PS D
Q Q* Q(unit)

Figure 2: Alcopops Market under Tax Effects

S D CS PS TR P Q Pb Ps DWL

Supply Curve Demand Curve Consumer Surplus Producer Surplus Tax Revenue Price ($) Quantity (unit) Consumers Willing to Pay Producers Willing to Sell Deadweight Loss

The thick line is the amount of consumers turn to buy substitutes instead of alcopops

Cong Thanh Luu -- 112318

Page 3

BEA683 Economis for Managers Research Project

Since producers bear all the tax, the supply curve is shifted up due to levying alcopops tax. As we can see from diagram, shifting supply curve upward would raise the market price of alcopops. In order to achieve to equilibrium state, producer have to reduce the quantity from Q* to Q. The difference between producers willing to sell and customers willing to pay is the tax. The drop in quantity would lead to the loss in consumer surplus and producer surplus, however, the total loss in CS and PS is offset by the governments tax revenue and deadweight loss. While a big proportion of this loss is offset by the tax revenue, the dotted area, there is a triangle of deadweight loss which is a real loss and not covered by the government in the form of taxes. The thick part on the supply curve is the reduction of alcopops producer due to tax. The thick part on the demand curve illustrates the amount of consumers who turn to consume other substitutes such as beers, spirits or wines instead of alcopops. These reductions of customers and producers result the deadweight loss. As the demand for alcopops reduced, the demand for substitutes such as beers, wines and spirits go up which means shift the demand curve for those substitute to the right.
P($)

S
P P*

D D

Q*

Q(unit)

Figure 3: Beers, Wines and Spirits Market under Alcopops Tax Effects

The demand curve of beers, wines and spirits shifted to the right cause the level up in both market price and quantity.

Cong Thanh Luu -- 112318

Page 4

BEA683 Economis for Managers Research Project Evaluation and recommendation

According to the analysis, levying tax on alcopops did reduce the quantity of alcopops consumed (30% reduction) which is similar to prediction. However, the decrease in alcopops consumption was substituted by other alcohol products such as beers, wines and spirits. This substitution, it would be even worse for young people since the alcohol drinks apart from alcopops have higher percent of alcohol and would be more harmful for health. Levying tax on alcopops is not enough to curb the incidence of binge drinking among young people; the government should impose tax on the entire alcohol market but not only on alcopops. Moreover, reducing the percentage alcohol contain in alcopops is also a possible solution for curbing the incidence of binge drinking.

Cong Thanh Luu -- 112318

Page 5

BEA683 Economis for Managers Research Project References

Alcopops' Tax: Heading In the Right Direction", Medical Journal of Australia, 190:6, 1517 Year Olds from 2000 To 2004, Sydney: Australian Department Of Health And Ageing Australian Bureau of Statistics (ABS) 2010 Apparent Consumption of Alcohol, Australia, 200809, ABS: Canberra (Www.Abs.Gov.Au/Ausstats/Abs@.Nsf/Mf/4307.0.55.001/). Australian Divisions of General Practice 2003 "Ready To Drink? Alcopops and Youth Binge Drinking", Manuka: Australian Divisions of General Practice. Chikritzhs TN, Dietze PM, Allsop SJ, Daube MM, Hall WD & Kypri K 2009 "The Druginfo Clearinghouse 2008 Ready-To-Drink (RTD) Alcohol Products, Melbourne: Australian Drug Foundation (Www.Druginfo.Adf.Org.Au/Druginfo/Fact_Sheets/Rtd_Alcohol_Products). King E, Taylor J & Carroll T 2005 Alcohol Consumption Patterns among Australian Munro G & Learmonth A 2004 "An Unacceptable Risk: The Problem of Alcoholic Milk", Drug & Alcohol Review, 23:3, Pp. 3459. Parliament Of Australia. Senate 2008 Inquiry into Ready-To-Drink Alcohol Beverages, Canberra: Senate Community Affairs Committee (Www.Aph.Gov.Au/Senate/Committee/Clac_Ctte/Alcohol_Beverages/Report/Report.Pdf) Pp. 2945

Cong Thanh Luu -- 112318

Page 6