In this presentation, I will look at the impact on consumers, pub and beer producers and the government revenue after duty rates for draught beer and cider are reduced by 5%, taking 3p off per pint.

To introduce the scenario, draught beer taxes are being reduced as part of a major revamp of the UK’s alcohol tax structure. Draught beer and ciders’ duty rates will be reduced by 5%, saving 3p on a pint in pubs. Additionally, taxes on sparkling wine and other lower-strength goods will be reduced. The idea is to boost a struggling alcohol sector that has been affected by the ongoing COVID-19 crisis.

In addition, elasticity impacts whether or not manufacturers are able to pass on higher costs to the customer through price increases. This is where the vast majority of addictive items may be found in abundance. For example, the demand for alcoholic beverages such as cider and beer is typically inelastic among regular users who are addicted. This means that consumption remains relatively the same despite the prices. According to the findings of D’Annunzio, Mardan, and Russo (2020) study, lowering taxes on inelastic commodities will result in a considerable boost in consumer demand, a reduction in prices, and significant increase in quantity demanded.

From this information, I first assume that the demand for beer and ciders is inelastic, following a study by Gallet (2007) who found alcoholic and other addictive products to have relative elasticity. Therefore, figure 1 below illustrates a demand curve drawn to show how the reduction in tax shifts the supply rightwards, from S0 to S1 and this affects the equilibrium causing it to sift from E0 to E1 as indicated below. The overall effect is that the prices will be substantially lowered for beers and ciders with minimal impact on the quantity of the product sold.

Figure 1: effect of reduced tax with inelastic demand

In figure 1 above, the reduction of taxes for beer and ciders means that the consumer benefits more by paying less for the same product. This is because of the inelasticity of the demand curve that reduces the prices due to the movement of the supply curve.

The producers are likely to be in a bind due to the reduction in tax. With the extreme inelastic demand of beer and ciders, the prices will drop while the quantity does not change with a lot. Consequently, the reduction in tax will lead to a reduction in revenue that producers earn from the sale of alcohol. If any producer decides not to implement price cuts, it may be driven out of the market if all other firms do. The decision to reduce taxes will also result in a reduction on government revenue in the short term but will increase slightly in the long term as consumption of beer and ciders increase due to the decrease in price depicted in figure 1 above.

Figure 2: effect of reduced tax with elastic demand

However, in figure 2 above, the demand curve is highly elastic. Assuming that beer and ciders have elastic demand, the reduction in tax leads to greater quantities sold in the sector at close to the initial process. The consumer still benefits from greater quantity at reduced prices. Again, producers bear a greater tax burden with more quantity produced. Consumption will increase slightly and revenue will increase only a little.

Thank you for your time this is the end of my presentation.

References

D’Annunzio, A., Mardan, M., & Russo, A. (2020). Multi‐part tariffs and differentiated commodity taxation. The RAND Journal of Economics, 51(3), 786-804.

Gallet, C. A. (2007). The demand for alcohol: a meta‐analysis of elasticities. Australian Journal of Agricultural and Resource Economics, 51(2), 121-135.