Using a graph, provide reasons for the placement of a sales tax on alcohol. (5 marks)

Alcohol is seen as an example of a demerit good. This means that upon consumption of the good,whilst the consumer receives a private benefit, they push a negative impact onto a third party, in this case society. This is called a negative externality in consumption. We assume that people are inherently more interested in themselves than society, and therefore their consumption of the good extends beyond the Socially Optimum Level (Qsol), and therefore the quantity consumed is represented by the demand curve plus the External Cost - that which is placed onto society. By placing a sales tax on alcohol, we increase the firm's costs of production and therefore supply shifts left, resulting in a decrease in quantity consumed. Therefore, if the tax placed is the correct amount, we should reach the Scially Optimum Level.