October 11, 2014
Price, cross, and income elasticities—How do they relate to alcohol and cigarettes? Go to the National Bureau of Economic Research (NBER) Web site, www.nber.org, and select New Working Papers. In the Google search space, type "alcohol." Use the titles and summaries of the papers to answer the following questions relating to elasticity: (a) Do the mentally ill have perfectly inelastic demands for cigarettes and alcohol? (b) Does alcohol consumption increase in bad times? (c) What is the effect of cigarette taxes (and smuggling) on the consumption of alcohol? What does that imply about the cross elasticity of demand between the two? (d) Is binge drinking among college students sensitive to the price of alcohol?
a) Mental illness could affect the level of consumption of addictive goods and could affect the price elasticities of addictive goods. The results show that individuals with a history of mental illness are 25 percent more likely to consume alcohol, 69 percent more likely to consume cocaine and 94 percent more likely to consume cigarettes. Individuals with a history of mental illness are reactive to price although the price elasticites differ somewhat from those without mental illness. These results provide an added justification for higher taxes and other supply reduction activities since they show that these policies are effective with this high participation group.
b) Long-term research from the US and Europe shows overall alcohol consumption doesn't rise much during recessions and can even decline. In the US, for example, a 1 percent increase in state unemployment corresponded to a 3 percent reduction in alcohol consumption. The decrease was even larger when unemployment went up nationally. Recessions don't make people stop drinking alcohol altogether. Instead, they change how much and what kinds of alcohol they drink. In tougher times, people are less likely to eat and drink...
Please join StudyMode to read the full document