The Economist Approach
To an economist, the problem of alcohol abuse is viewed as an externality in both consumption and production. The value to consumers is greater than the value to society. Alcohol consumption is linked to many social problems, and addressing these problems diverts a significant amount of resources that could have been used in other productive activities. The two potential solutions include the use of taxes or Pigouvian regulations. These will help to raise the cost (price) of alcohol consumption through increased taxes and reduced availability. The second solution relates to imposing tariffs on producers involved in the production and sale of alcohol. Such a policy reduces alcohol consumption because the producers transfer the taxes to the final consumer, making alcoholic beverages more expensive for the consumers (Lipsey & Courant, 2008).
Garrod and Willis (2007) note that the law of demand and supply is one of the most primary principles that run an economy. Prescription drugs are those types of drugs that the government regulates through legislation, and they are not sold over the counter. Consequently, the cost of prescription drugs is related positively with the cost of health care in the economy. When the cost of health care is high, prescription drugs will take a big portion of the consumer`s budget leaving less income for the other goods and services. Similarly, if the prices for prescription drugs are low, more money will be available to spend on other goods and services.
Significance of Elasticity of Demand in Analyzing the Impact of a Shift in Supply
Price elasticity of demand measures the degree of responsiveness of quantity demanded to changes in prices. Quantity demanded is determined by individual preferences, psychological variables, and social factors. When an increase in the price of a service or a product leads to a proportionately larger decrease in...