Question

Suppose that the government imposes a commodity tax on alcohol. Assuming that both alcohol demand and supply are relatively elastic, what happens to alcohol consumption and to the alcohol market price?

a. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers.
b. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers.
c. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers.
d. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers.

Answer 1

Answer:

c. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers.

Explanation:

Elastic demand is the situation that when the price of a good goes up the quantity demanded reduces. Since alcohol demand and supply are both elastic, If commodity tax is imposed on sellers then they decrease the supply and increase the price of alcohol. The increased price of alcohol will make buyers buy less of alcohol thereby reducing the consumption of alcohol.

Answer 2

In Economics elastic requirement occurs when there is a variation in quantity demand due to which the cost of the goods goes up.

The correct answer is:

Option C. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers.

The reason for this is:

• The order and the stock for alcohol is elastic.

• If commodity tax is imposed on traders then they will raise the cost and will reduce the demand.

• An increase in cost will influence the consumer base as they will purchase less alcohol and the consumption of alcohol will reduce.

Therefore, alcohol consumption will decrease.

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