http://www.rferl.org/content/Russian_Commission_Approves_Setting_Minimum_Price_For_Vodka/1882839.html
This kind of behaviour may have led to them doing this:
An alternative argument about this topic which you may not find in your textbooks:
- Control of demerit goods is argued for not only because of the high level of negative externalities, but since consumers are presumed to have less than perfect knowledge about these goods' private costs.
- However, it may be that consumers have made a fairly rational decision based on weighing up utility with possible costs, discounting any costs coming far into the future. As we saw last week Keynes said in a different context "in the long run, we are all dead" :( . I don't know any smokers, for example, who are unware of the health risks of their habit.
- Therefore it could be argued that all government action achieves here is a restriction of individual choice and interference with consumer's pleasure and business's profit.
I guess, the Russian government is not targeting people who are living in the city, working in the office or going to university, who of course are aware of possible outcomes of consumption of alcohol. People leaving in city can afford new price since it is not very big. The government is targeting people from small villages on far north or far east of the country, in Siberia, who probably didn't even attend school, who don't have the Internet or TV to tell them about "negative externalities from consumption of demerit good such as alcohol". It can be argued based on this that people in these areas are not aware of costs at all.
ReplyDeleteAnd since people do not possess any information about costs they cannot make "a fairly rational decision". Current costs are negligible, future costs are unknown, discounted, future for people seems to have very low value. So people prefer to drink today rather then work tomorrow, eventually dying early.
So from demographical, political and economical point of view government has to intervene.
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ReplyDeleteIn highly concentrated in terms of population districts such Moscow there is a great possibility of creation of black markets - what about them, then?
ReplyDeleteIf so, it could be reasonable to restrict the prices in Syberia, for example, but leave them in Moscow.
I doubt the possibility of black markets emerging in Moscow or other big cities. People leaving there are making enough money to leave there! Alcohol is not a great proportion of their expenditure, so I think they can afford the price rise. It is hard to imagine a Londoner who refuses to buy a pint of beer because it costs 1 pound more. Black markets carry too much risk and in this case won't be profitable enough to cover all emerging risks.
ReplyDeleteAs concerns "it could be reasonable to restrict the prices in Syberia, for example, but leave them in Moscow." - that is exactly what I am trying to say.
"it could be reasonable to restrict the prices in Syberia, for example, but leave them in Moscow"
ReplyDeleteThis is even more likely to create Black Market as the Local Government will not be able to control the transportation of these goods or this distribution may increase the cost of vodka, which would raise the price of Vodka even more.
It may also lead to the increase in corruption due to weak restrictions on it.
To add, an increase in prise is still achievable for whose in big cities while there is already kind of black market in rural areas of the country known as "home-brew production".
Increase in cost of vodka on the black market due to higher costs on transportation from Siberia to Moscow and to higher expenditure on bribes may lead to the vodka on the black market being too expensive to buy, compared to the possible risks of being jailed. So the black market will not emerge as it will be unprofitable.
ReplyDelete"Local Government will not be able to control the transportation of these goods"
ReplyDeletewhy not?
Anna, i'm not sure which government you mean, but is the Local Government is the govenment in Syberia, then yea, as Anton said, it would be too expensive to trasnport vodka from Moscow to Syberia. Another thing is that there might be introduced a limit for purchase in Moscow: in order to purchase in gross, the special allowance may be required.
In addition since the TOTAL consumption of alcohol is much higher in Moscow than in Syberia, it would be much more reasonable to create a black market in Moscow rather than in Syberia,in a case if limitations are introduced in both districts.
Home-brew produciton scales are too small in order to create a real black market with a potential of competitiveness.
"there might be introduced a limit for purchase in Moscow: in order to purchase in gross, the special allowance may be required." - I hope they would not, such step provides too much space for corruption in the governing bodies!
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