Demerit goods in action
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Two news stories catch the eye today with respect to demerit goods.
Firstly, the government plans to reclassify cannabis as a class B drug - but will this have any impact on its levels of use? Arthur Ma, in a related blog entry, has explored the issue in greater detail here.
Secondly, alcohol abuse is harming the health and productivity of the UK’s workers. According to the BBC, one on three employees admits being hungover at work.
Market failure and government failure are important topics for most AS (and A2) economics syllabi.
Questions:1. ‘The demand for habit-forming drugs such as alcohol and tobacco is price inelastic’. Using a diagram, assess the effectiveness of a tax on drugs to (i) reduce quantity bought and sold, and (ii) raise tax revenue.
2. In what ways could tighter regulation on drug use be (i) beneficial, and (ii) harmful?
3. Evaluate the effectiveness of possible policies to tackle the negative externalities associated with alcohol and cannabis use. (Which are most effective - policies which restrict supply, or those which reduce demand?)
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