Question

The Western Australian government is thinking of setting a minimum price on alcohol in order to minimise the risk of alcohol related illness. Using a diagram, explain the solutions/measures a government can take in addressing the unintended consequence of a minimum price.

Answer 1

Due to the imposition of minimum price about the equilibrium price of Pe, there would be surplus of alcohol because at price of Me, there is more supply of alcohol than demand of it. Here government is trying to reduce the intake of alcohol by raising its price but the unintended consequence of it will be that when there is surplus of alcohol, producers tends to sell it at lower prices possible to reduce their inventories and circulate their cash flow. This becomes an issue when government tries to raise the prices while producers sells at lower prices. For this, government can adopt a policy through which they are more organized in their trade with rest of the world and export their surplus alcohol to other countries. It would reduce the intake of alcohol in domestic country as well as gives enough revenue from exports.

Quantity Supply Surplus Me Minimum Price Demand Price