Price Elasticity of Demand

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The aggressive amount of tax imposed on the alcopops reduces the purchasing power of people and thus discourages the people to drink more and more of a product. Positive externalities exist when the marginal social benefit of production and consumption is more than the marginal private benefit.An externality is an effect of a purchase or consumption decision of a particular product by one party on the other party who has no choice but to live with that. The imposition of higher tax rates on alcopop products results in the elimination of negative externalities of alcohol abusers. With the imposition of higher tax rates on alcopop products, the marginal social benefit would be higher than bore and the marginal private benefits of the alcopop producers will reduce. Thus, discourage the consumers to consume more and more of a product who have to pay more for consuming the product.This effect has been shown in the above diagram in which it is clearly shown how I’m position of high tax rates on the product can affect the consumption and production of products causing negative externalities. In the above diagram social benefits are increasing and the high tax rates have also brought the demand of the product down, therefore, now excessive drinking will be avoided by people because it will become too expensive to afford. The advantage of the imposition of higher tax rates is that it provides incentives for removing the negative externalities of excessive drinking, increases social efficiency, and also increases revenue for the government.The demand for products like alcopops is most of the time inelastic as those customers who are addicted to these products will not compromise on the consumption of these products, it doesn’t matter how much price they have to pay for the getting hold of the product. This means that the consumers will still buy the product at higher costs despite the increase in the cost of the product.