Amid Fight Over Teen Drinking, Panel Weighs New Alcohol Tax
Subject Excise Tax and Reduction in Consumption
Topic Market Failure, Regulation, and Public Choice
Key Words Excise tax, advertising, lobbying, consumption, price, revenues, social cost
News Story

A study is due to be released from the National Academy of Sciences that will outline policies designed to reduce underage drinking of alcoholic beverages. The panel reportedly will suggest heavy increases in the excise tax on alcohol and restrictions on the kinds of advertising for these products that can occur. Citing sexually suggestive ads for beer and alcohol, critics note that the industry appears to be marketing specifically to underage crowds.

Lobbyists for the beer industry have opposed such restrictions, favoring instead a push for parents to provide instruction on the dangers of underage drinking. While the industry deplores underage drinking, it notes that the level of consumption has been falling. The Bush administration and a significant portion of congress appear to support the industry in this matter.

Studies have shown that teenage consumption of alcohol is closely tied to price, in much the same way as teenage consumption of tobacco products is tied to the price of tobacco. Experts note that high excise taxes on cigarettes have appeared to curb teenage smoking, and that the same could occur with underage drinking. Philip Cook, a Duke University economist, has weighed in on the argument, suggesting that, "current excise taxes [on alcoholic beverages] are too low, both nationally and in every state. The rates are far less than the average social cost of each drink consumed. Raising the excise tax would be in the public interest." (as quoted in article)

(Updated August 27, 2003)


What is the likely effect of an increase in the excise tax on the price and quantity of alcohol in the market? Draw a supply and demand graph to illustrate this effect.

2. What are policymakers assuming about the relative elasticity of teenage drinkers for an increase in the tax to reduce consumption? Why?
3. What is the likely effect on alcohol producers' revenues if this excise tax is increased?
4. If the current excise tax is below the social cost of underage drinking, then is the current level of consumption too high or too low? Illustrate using a graph.
Source John R. Wilke and Christopher Lawton, "Amid Fight Over Teen Drinking, Panel Weighs New Alcohol Tax," The Wall Street Journal. 12 July 2003.

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