Assignment 1: Principles of Economics

Topics: Supply and demand, Economics, Elasticity Pages: 4 (1248 words) Published: November 3, 2012
Assignment 1: Principles of Economics
Cletajo Hollingsworth
ECO 100
29 January 2012

Suggest how an economist would approach the problem of alcohol abuse.
Economics is about scarcity and choice. It is assumed that all human beings are rational thinkers hence would always choose to consume products that would give them maximum satisfaction or utility. Mankiw (2011, p. 6) argues that rational people ‘systematically and purposefully do the best to achieve objectives given available opportunity.’ Given a choice among alternatives and with scarce resources, one would evaluate the benefits and costs of consuming an extra unit of a product and would only take a decision only if marginal benefit is greater than marginal cost. In this case, to solve the alcohol abuse problem, one has to consider marginal benefits and marginal costs derived from consuming an extra unit of alcohol and since excessive drinking has more costs than benefits, one would refrain from alcohol. The opportunity cost foregone by choosing to abuse alcohol is too high compared to satisfaction derived; money spent on alcohol can do many other things such as feeding the family, education for children, and investments among others. Besides, the person may have health problems thus adding to the costs. By considering all these factors, a rational person would refrain from alcohol abuse.

Heyne (2000) acknowledges the role played by incentives in directing behavior. For him, rational people usually respond to incentives or are induced to act by them. Assuming alcohol abusers are rational, imposing taxes on alcohol substances would eliminate the problem. This would follow the law of demand which states that other things being constant, if the price of a good increase, the quantity demanded of the good decreases. Taxes have the effect of increasing alcohol prices and this would automatically mean that the abusers would desist from alcohol consumption or cut their consumption.

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