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Economics for Managers

PART ONE: Demand, Supply and Taxes [18 total marks]
1) Using a graph, show how a tax affects an initially unregulated market equilibrium for
alcoholic drinks. Then, using welfare analysis, identify the differences in consumer
surplus, producer surplus, deadweight loss and government revenue before and after the
tax. [7 marks]
2) How does the slope of the demand and supply curves determine the effect of an increase
in taxes on subsequent alcohol consumption? Who is more likely to change their behavior
as a result of an increase in alcohol tax: the consumer or producer? Why? [7 marks]
3) According to the article, what is the primary purpose of the proposed changes to alcohol
taxation? Do you think it will be effective? Are there better alternatives to a tax? [4
marks]

PART TWO: Market Structure [12 total marks]
1) Draw a graph depicting a single firm in the market for alcoholic drinks, assuming the
market is perfectly competitive. [4 marks]
2) Using a graph, introduce a tax on alcoholic drinks in the market. How does this affect the
individual firm, and the rest of the perfectly competitive market? Differentiate between
the long and short-run. [4 marks]
3) How does your answer in (2) change if the market was a monopoly instead? Show this on
a graph and explain. [4 marks]

ARTICLE
Tax shake-up to hit beer, wine prices
___________________________________________________________________________
by Josh Gordon, January 17, 2010, (www.theage.com.au)
_________________________________________________________________________________
THE price of full-strength beer and wine would rise under a sweeping overhaul of Australia’s
haphazard alcohol tax regime being considered by the Federal Government.
In a change that could boost the budget bottom line by as much as $2.9 billion over four years, a
review of the tax system headed by Treasury boss Ken Henry is believed to recommend replacing
Australia’s antiquated and complex alcohol excise regime with a simpler ”volumetric” system based
on alcohol content.
The Sunday Age believes that in an acknowledgement of the health and social costs inflicted by
alcohol abuse, Treasury has proposed a stepped approach, with tax rates progressively increasing
according to alcohol content. The thresholds are believed be 3.5 per cent, 5 per cent, 7 per cent, 10 per
cent, 15 per cent and 22 per cent.
Australia’s alcohol excise regime is one of the most complex in the world, with an array of rates and
rules for different alcohol products. The amount of excise on beer, for example, varies dramatically
depending on whether it is sold in a keg or a bottle. Brandy is taxed at a concessional rate compared to
other spirits. Small wineries receive generous tax concessions, which have been blamed for propping
up uneconomic businesses and encouraging a grape glut, yet micro-breweries must directly compete
with multinationals such as Fosters and Lion Nathan.
An analysis by accounting firm KPMG for the Distilled Spirits Industry Council of Australia found
that a proposal for a volumetric tax with seven excise rates for different alcohol thresholds would lift
full-strength beer prices by about 5 per cent, or $2 a case. Wine prices would likely rise around 1 per
cent, while spirits, which are already heavily taxed, would remain about the same.
The analysis found the changes would boost the budget bottom line by $2.9 billion over four years
and would cut alcohol consumption by 3 to 4 million litres a year, equivalent to a 2 per cent cut.
VicHealth chief executive Todd Harper said it was impossible to tackle Australia’s alcohol problem
without changing the way it is taxed.
”You can’t have cheap grog and a society that is free of accidents and injury,” Mr Harper told The
Sunday Age. ”Health groups have certainly been arguing that the most effective way to reduce harm
would be through the alcohol excise regime and the best way to do that is a stepped volumetric tax.”
The final report to the Federal Government from its Preventative Health Taskforce also recommended
a ”rationalised tax and excise regime for alcohol that discourages harmful consumption and promotes
safer consumption”.
The Henry review is currently in Treasurer Wayne Swan’s office, with a response likely in about
March.
A spokesman for Mr Swan said the Government was working through the report’s recommendations.
”We won’t be pre-empting the release; however, the Government’s priorities are well known: to build
a simpler, fairer and more competitive tax system to help meet future challenges.”

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