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The internet article Indians love Hard liquor, shun wine is somewhat true because Indians prefer
hard liquor and beer because these go along well with Indian cuisine which is of a spicy nature.
Wine on the other hand is usually preferred with western cuisine which is milder. The choice of
alcoholic drinks is normally based on the tastes and preferences of the consumer, but with passing
time, it is seen that the preference of the consumer becomes more of an addiction. This causes the
demand to become increasingly inelastic and thus becoming a part of the daily lifestyle of the
average Indian. Demand indicates the various quantities of a good brand that the consumer is
willing to pay albeit at different prices during a particular time period. On the other hand, alcoholic
drinks are manufactured goods and thus have an elastic supply. Normal profit is the minimum
amount of revenue generated by a firm which will sustain it and thus induce it to keep running.
Economic profit is the total revenue minus economic costs.


From the figure alongside it can be noticed that as
Indians begin to demand more alcohol after it becomes
an addiction, the quantity of alcohol consumed increases
and that causes the demand curve to shift.
Simultaneously we see that the price of the product
increases from P to P2 as the quantity consumed
increases from Q1 to Q2, where P is the price at which
the firm gains normal profit to sustain its operational
status. As the price of the product increases the firms
began to make an economic profit which attracts other
firms into the market and thus results in a shift in the
supply curve towards the right. Hence the factors of demand and supply reduced the price to the
previous price P but with a quantity of Q3.

This gives the alcohol consumers an incentive to increase their consumption of alcohol in the long
run.

There are a huge number of negative
externalities associated with alcohol
consumption ie. A consequence of an
economic activity that is experienced by
unrelated third parties.
Consumption of alcohol has a negative effect
on the consumer (MPC) but moreover on the
society around (MSC). It is seen that 33% of
car crashes at night are because of drunk
driving. Violence under the influence of
alcohol also affects the society causing the
loss of lives says Dr Alwan. The supplier
must produce the quantity Q(soc opt) to
internalize the negative externalities, but the
alcohol is being produced at Q0 at price P0
which leads to a welfare loss in the society. Thus taxation by the government is the only viable
solution. We can see that after taxation the welfare lost occupies a smaller area and the price raises
from P0 to P1. Also this taxation may lead to the demand of alcohol to drop which is the final aim
of the government. Conversely this drop in demand may lead to a reduction in supply, which may
lead to unemployment. If the people are unemployed the country becomes productively inefficient.
That means that the country has to bear the costs to house and feed the unemployed at the cost of
the tax payers, compensating on efficiency.

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But it must be realized that a majority of the hard liquor is consumed mainly by higher income
group. So if the tax is imposed it will mainly affect the poor who only occasionally consume Hard
liquor. Hence by this tax, we can prevent only a small fraction of the consumers from consuming
hard liquor, while the higher income group will not be affected to a great extent and may continue
to consume large amounts of alcohol. Also it is known that in India, Hard liquor is cheaper than
wine. Hence if the price of hard liquor is increased higher than that of wine the market demand of
wine may increase. Wine, although containing alcohol, is still a healthier option than Hard liquor. It
may also be so that the regular consumers of alcohol may shift to a different addiction like smoking
and drugs, rather than to wine, which have a larger negative effect than alcohol. Hence we can say
that although there are negative effects of consuming hard liquor rather than wine, the negative
effects could be greater than they are now.




Bibliography
http://www.investopedia.com/terms/e/externality.asp#axzz1oMPZhz00
Book : Economics for the IB Diploma by Ellie Tragakes.
Book : Economics - in terms of the good, bad and the economist by Matt Mcgee (2
nd
Edition)

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