Is Minimum Price Affecting Wales's Market Failure?

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Wales is setting a minimum price for selling alcohol to decrease the negative externality of alcohol.

Minimum price also known as price floor refers to the setting of the price higher than the market equilibrium by the government and no seller can sell the goods at a price lower than this. Alcohol is a good with a negative externality of consumption which is when the consumption of a good results in a negative external effect to the third party. By setting the minimum price for alcohol, the government of Wales is trying to discourage drink binging by putting a high price on a demerit good, which are goods that the government think are bad for both people who consume the good and society as a whole, wanting the people to consume the demerit …show more content…

The MPB line is the private demand curve that is based benefits to the consumers. The MPB line is not equal to the MSB line because of the negative externalities causing this situation to be a market failure.

One of the factors of how a negative externality could contribute to the market failure is by the overprovision of a demerit good. People in Wales who consume alcohol would not consider how detrimental their negative behaviour and added medical costs as a result of consuming alcohol could affect the third party, but would continue their drinking, as alcohol is an inelastic good.

However, if we take a closer look on the diagram, the MPB curve is greater than the MSB curve showing that the product is not being consumed at the socially desired level of MSB equalling the MSC curve, resulting to a welfare loss of the triangle which is shaded in purple.

In the negative externality of consumption, the MSB is less than the MPB which explains why the MSB curve lies to the left of the MPB curve. The socially optimal quantity is located in Q* which is at the MSC = MSB point where the price would be …show more content…

If the P1 line is positioned under the equilibrium price, it will not impact on the third party and the price would remain at the equilibrium price. However, if the minimum price set by the government is above the equilibrium price, it would result in an inverse relationship where there will be a increase in price but a decrease of the consumption of alcohol, which will lead to the achievement of the government of Wale’s theme trying to decrease the consumption of alcohol which affects the human body and the society negatively.

Theoretically, the increase of the price of alcohol should discourage consumers from buying but as it is a somewhat of an inelastic good, people may still continue to buy it regardless. However, this would come with several negative externalities, depending on income. The increase in price is selective for specific income groups at the lower end, because it targets cheap alcohol.

For wealthy individuals, it would prove to be an inconvenience, even if they chose to purchase cheap alcohol, but for middle and lower income people, this policy could have a stronger impact. Lower income individuals might increase their debt while sacrificing more important aspects of their health, leading to more health costs. These illnesses would lead to lower productivity and potentially employment

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