Nov 06 2009
Russians and their love affair with vodka
Published by Andrew McCarthy at 1:32 pm under
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WikipediaThe elasticity, or perceived necessity of different products can influence the decision to introduce a tax. In Russia, two products, Beer and Vodka are being looked at as a potential sources of new government revenue. A proposed increase in the tax duties on beer, will potentially increase retail prices by between 20-30%. An increase in the price of one form of alcohol (beer) could shift demand towards other close substitutes, such as vodka or home brewed spirits. Hopefully, increased tax revenue will support the government finances and in the long run, the money could be reallocated to treat alcoholism.
An Economist article from last week gives a good analysis of this issue. Russia is a country where people drink 30 litres of hard liquor alcohol each year, six times more than the average European. Alcohol taxes are a sensitive subject, and the implications complex, but they need to be addressed.
The Economist – Russia raises tax on beer: Sin-Tax Error
Discussion Questions:
- “Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka.” What does this quote suggest, about the cross elasticity of beer and spirits in Russia. Use evidence from the article so support your explanation.
- The Russian government is suggesting adding a tax to beer. What effect do you think this will have on the market price and market quantity of beer consumed.
- The government wishes to impose a tax on these products. Assume a specific tax is imposed on each product. Assume the demand for beer is relatively elastic and the demand for vodka relatively inelastic and draw two graphs to show the effect on consumers and the relative tax burdens.
- Explain what the aim of introducing taxes on vodka and beer is. Evaluate if the taxes will achieve the aims of increasing government revenue and reducing the social harms related to alcohol consumption in Russia.
About the author: Andrew teaches IB Economics and IB Business Management at the International School of Singapore. He has previously taught in Wellington, New Zealand and graduated from Victoria University of Wellington. Related posts:
- The role of advertising in determining price elasticity of demand
- Someone help me, I’m “addicted” to air travel!
- Would a soda tax make Americans better off?
- Supply – side economists: “lower taxes, more growth, more tax revenue!”
- What are you Laffing at? The relationship between tax rate and tax revenue
Teachers!
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According the ChartsBin chart “Current Worldwide Alcohol Consumption among Adults”. Not only Russia have love affair with alcohol. All developed countries have their love.
Explain what the aim of introducing taxes on vodka and beer is. Evaluate if the taxes will achieve the aims of increasing government revenue and reducing the social harms related to alcohol consumption in Russia.
The aim of introducing taxes on vodka and beer is so the government revenue will increase so the government can use this money to treat alcoholism. First of all, in my opinion the government has to introduce a tax on both products otherwise the government revenue will not increase since the consumer will buy the substitute of the product. They will not archieve anything when they only tax vodka because the consumer will then consume beer. THe demand for the products will most porbably not decrease drastically since alcohol is a inelastic product; quantity demanded does not respond strongly to a price change.
Additionally I think the government should try to rise the taxes for both beer and vodka as high as they can, so people in the lower class where unemployement is very high, do not have the chance to start or countinue drinking. The only thing those people have left is alcohol so the government should solve this problem as well. The money they save from the people who stop drinking, they can use for either the treatment of alcoholism or other treatments.
Nice comments, Luisa.
The additional impact of rising taxes as far is possible the the effect on inequality. People on high incomes will perhaps still purchase alcohol despite the prohibitively high tax, for poor people the tax and alcohol will take a larger portion of the persons income, thus it becomes regressive towards low income earners. If these low income people switch to black market, home brew spirits the problem may worsen.