Worried about excessive drinking, the British government increased the tax levied on beer by 42% from...
Worried about excessive drinking, the British government increased the tax levied on beer by 42% from 2008 to 2012. Under what conditions would a specific tax substantially reduce the equilibrium quantity of alcohol consumed? Answer in terms of the slopes of the demand and supply curves.
Homework Answers
The specific tax is propotional to the quantity of goods regardless of the price of the goods. It is imposed on per unit of the goods produced.
An imposition of specific tax will shift the supply curve to the left. If the supply curve is having a positive slope, then, the impositipn of specific tax on a particular product will reduce the supply and to attain the equilibrium the prices will increase but less than that of the specific tax.
But, if the supply curve is having a negative slope, by the imposition of a specific tax, the prices will rise by an amount greater than the specific tax.
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