Microeconomics Essay- Suppose the Government Raises the Legal Drinking Age in the Uk from 18 to 21. Conduct an Economic Analysis of This Policy to Examine Its Impact on Affected Markets.

1260 Words Aug 17th, 2012 6 Pages
Suppose the government raises the legal drinking age in the UK from 18 to 21. Conduct an economic analysis of this policy to examine its impact on affected markets.

With reference to the above statement, if the UK government were to increase the legal drinking age from 18 to 21 there are two markets that would mainly be affected- the producers, which is the alcohol industry as a whole and the consumers who are the UK citizens between the age of 18 and 21. A market is a group of buyers and sellers of a particular good or service.(Mankiw) Alcohol is a demerit good. These are goods that are over-produced and over-consumed. They are goods that the government considers harmful for both the people who consume them and for society as a whole,
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Alcohol is inelastic in nature as it is habit forming and to a level considered addictive.

Price elasticity of demand = Percentage change in Quantity Demanded Percentage change in Price

If PED is equal to zero, then a change in the price of a product will have no effect on the quantity demanded at all. If it is less than one and greater than zero it is inelastic and if it is greater than one and less than infinity it is elastic. In our case, a low PED means the imposition of such a rule may not lead to a significant decrease in quantity of alcohol demanded.

Diagram IV

Diagram IV shows a steeply sloping inelastic demand curve. There is an increase in price from P1 to P2, which leads to a relatively small decrease in quantity demanded from Q1 to Q2.

Under Elasticity of Demand there are two more types that I have not spoken about, one being the Income elasticity of Demand (measures how much the quantity demanded changes as consumer income changes) and the other being Cross Price Elasticity of Demand (measures how the quantity demanded of one good changes as the price of another good changes). I could say that cross price elasticity of demand holds relevance because when consumers are not given a particular good

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