Go to the National Bureau of Economic Research (NBER) Web site, http://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? Elasticity helps us define the relationship of changes in price and incomes to the effect of supply and demand. The question posed is: do the mentally ill have perfectly inelastic demands for cigarettes and alcohol?
First, we must define what perfectly inelastic demand is. As defined by our textbook, a perfectly inelastic demand is one in which price change results in no change whatsoever in the quantity demanded. This is further defined as an extreme case. After reading a paper written by Henry Saffer and Dhaval Dave in 2002, the conclusions were rather convincing. When mental illness is not factored into price elasticity for cigarettes and alcohol, it is determined that raising the price of these addictive goods will lower the demand for them.
The paper shows that mental illness raises the consumption of these addictive goods by 94% and 25% respectfully. Further, the test for elasticity was performed with this specific group in mind. It was determined that mental illness had no substantive effect on the price elasticity of cigarettes and alcohol. With this in mind it is easy to draw the conclusion that the mentally ill do not have perfectly inelastic demands for cigarettes and alcohol. Reference Working paper 8699 Mental Illness and the demand for alcohol, cocaine and cigarettes by Henry Saffer and Dhaval Dave.
b) Does alcohol consumption increase in bad times? Before reading this article and looking at the question presented in front “ does alcohol use increase in bad times? ’’ you would quickly determine that logically the answer is yes. With simple knowledge of alcohol intake one would be provoked to think alcohol in bad times can be used as self-medication to the lack of income. We have all seen that famous scene where a stressed individual will order numerous shots of hard liquor to ease their sorrow, but nevertheless with all that simple knowledge the answer to the question is actually no.
By the research done in this paper by Christopher. J Ruhm he brings to light that alcohol intake doesn’t have a positive increase in bad times instead it has a decline in consumption. He uncovers that heavy drinkers decrease quite a lot with the loss of income, and that even recreational and binge drinking declines as well though at a smaller pace. As a whole, alcohol consumption doesn’t increase during bad times overall. Reference Working paper 8511 Does Drinking Really Decrease in Bad Times? By Christoher Ruhm and William Black
(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? Tax implications and its effect on alcohol consumption were studied in detail in working paper 8962. This study was done in Canada. What the writer found was that higher tax rates for cigarettes wouldn’t stimulate alcohol consumption as a replacement habit. When smuggling was factored into the equation, it was found that in Canadian smuggling could have increased both cigarette and alcohol consumption.
After analyzing the data with two different data sets and trying to determine cross elasticity, the first analysis determined that cigarettes and alcohol were complimentary, as cigarette consumption decreased, so did alcohol consumption, when smuggling is not factored. However, when a different data set is used, the FAMEX data, then the two were found to be independent. This forced the writer to concede that no conclusion could be drawn on the subject at the time, but that the writer could conclude that alcohol is not a substitute of cigarettes.