U.K. Alcohol Tax Changes

EconEye Admin

3 years ago

The U.K. government announced last week that alcoholic beverages will now be taxed based on their alcohol-by-volume (ABV) level. While most wines and spirits will rise in price, prices will fall on drinks with lower alcoholic percentages, as well as most sparkling wine.—theguaridan.com

Answer the following questions to check your understanding of the story.

If the demand for alcohol is inelastic, who will pay the additional tax on the drinks that have a high ABV level?

The additional tax will be paid ____________.

a) only by the seller

b) mostly by the seller

c) mostly by the buyer

d) only by the buyer

Wrong! - When demand for a good is inelastic do the buyer and seller split the tax or does only the buyer or only the seller pay the tax?

Correct! - When demand for a good is inelastic but not perfectly inelastic, the buyer and seller split the tax, but the buyer pays more.

If the demand for alcohol is inelastic, how will the tax revenue change when the additional tax is added to high ABV beverages?

Tax revenue will ____________.

a) increase because consumers will not change the quantity of alcohol they purchase

b) decrease because people will substitute from high ABV beverages to low ABV beverages

c) increase because the increase in the tax decreases the quantity sold by a relatively small amount

d) decrease because the increase in the tax decreases the quantity sold by a relatively large amount

Wrong! - Demand for alcohol is inelastic. How do people respond when the price of alcohol rises? How does tax revenue change?

Well Done! - Demand for alcohol is inelastic, so when the tax increases the price paid, the quantity sold decreases by a relatively small amount and tax revenue increases.

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