Report On Excise Tax, Price Elasticity, Utility, Production And Cost Concepts, And Market Structures In UAE

Impact of Excise Tax on Carbonated Drinks and Tobacco

The Federal Tax Authority cautioned traders not to stock up soft drinks and cigarettes since they will have to   prove payment of tax on stocked goods after excise tax is introduced.  Excise tax will have an impact of increasing the prices of drinks and cigarettes. In regards, with the specific UAE excise tax situation, the prices increased by 50%.

            Traders who stock up their goods before excise duty is implemented are motivated by the urge to take advantage of the lower prices prior to tax. This implies that such traders might not purchase stock in the near future and hence will have denied the government of tax revenue. With the introduction of excise duty, traders will have to hike the prices of drinks and cigarettes so as to get a profit.  Stock up will have an impact of lowering the equilibrium price and increasing equilibrium quantity from that which could have existed due to introduction of the tax.

1. The survey was conducted at Happy Grocery stores to establish the impact of the excise tax effected by the UAE Federal Tax Authority at 1 st October 2017. In the survey, the enumerators interviewed the selected traders their selling prices of Coca cola 300ml carbonated drink and the demand of the product before and after the excise duty was effected. From the study, it was found that Coca-Cola 300 ml retailed at 1.08 Dh before the tax and 1.62 Dh after the excise tax while the demand declined from an average of 240 Units per day to 200 units. The price of Chester field red tobacco brand retailed at 2.1 Dh prior and 4.2Dh after the tax while its demand remained constant at 200 pieces per day. Monster energy drink also increased from 5.5 Dh to 11 Dh while its demand declined from 400 units to 300 units.

Chester field cigarettes are price inelastic and therefore, despite of the change in price from 2.1Dh to 4.2Dh, the quantity demanded remained constant at 200 pieces @ day. The product is an addictive product whose consumers purchase regardless of retailing price. Coca-Cola 300 ml soda is a luxury good with a price elasticity of -0.333. The increase in its price from 1.08Dh to 1.62Dh in response to the excise duty caused a decline in its demand from 240 units to 200 units per day since consumers could postpone its consumption in favor of necessary goods.

Monster energy drink is also price elastic (+0.25) and hence its price increase from 5.5Dh to 11Dh caused a decline in the quantity demanded. From the findings, the coca cola brand quantity decreased most because it has the highest price sensitivity as indicated by the high elasticity of demand of -0.333 since the product is a luxury good.

Utility is the amount of satisfaction generated from consuming a certain product. The total utility curve of the group member is illustrated below.

From the total utility curve below, it is evident that as the group member consumes more of the popcorns, his utility rises up to a point of diminishing utility. However, his consumption for movies rises continuously. The consumption of popcorns satisfies the law of diminishing marginal utility. Conversely, the consumption of movies des not satisfy the law of diminishing marginal utility. This is because movies are luxury goods while popcorns are normal goods. 75 popcorns will maximize his utility while it cannot be determined from the available information the number of movies that would maximize his utility since the graph has not reached its maxima.

In economics it’s important to calculate the monetary cost of production processes. Explicit costs is the monetary cost attached to factors of production. They are incurred when firms pay for using factors of production such as labor, capital, and land. Implicit costs are direct losses that arise from the use of factors of production (Ehrenberg & Smith, 2016).Unlike, explicit costs, implicit costs such as depreciation are not paid for in form of money although have a monetary value.

The distinction between short run and long run in economics arise from the presence and lack of fixed and variable costs. In the short run, both fixed and variable costs exists in the production process while in the long run, there exist no fixed costs. 

The U-shape of the LRATC curve occurs when minimum efficient scale is the amount of output which attained when the LRAC curve is at its minima. The diagram below shows the U-shaped LRAC curve. The increase in the size of the plant causes an increase in average production cost resulting to a decline in economies of scale. The Curve takes appositive gradient when returns decrease to scale as result of dis-economies of scale.

The law of diminishing returns arises since each successive unit of the variable factors of production has less of the fixed factor to work with. It states if one input of production is increased while other inputs are held constant, a level will be reached where additional input will lead to diminishing increases (Miller & Benjamin, 2017). 

Sunk costs are past costs that cannot be controlled anymore. For example the rent paid in the previous month is a sunk which is irreverent for decision making.

Market structures define how the market of various goods and services are organized. A perfectly competitive market is a market where firms sell identical products. The market is characterized by free entry and exit and high competition for customers. Among the existing firms, none has significant power over the rest. In the United Arab Emirates, the agricultural sector is an example of a perfectly competitive market.

Monopolistic competition market is a market characterized many small companies that compete against each other (Wooldridge, 2015). However, they trade on similar goods which are slightly differentiated. The companies compete against each other based on differentiation in product features and prices

Oligopoly market structure is a market characterized by few but large firms which are price takers. The goods and services offered are close substitutes of each while firms cannot wage price-based competition against each other. The firms also make super normal profits at both short run and long run. In UAE, telecommunications sector in a noticeable example of an oligopoly market.

Monopolistic market structure is a market place where there is only a single firm. In this market, the barriers to entry are high, buyers are price takers, and competition is low. This market is common for government controlled sectors of the economy. In UAE, the Emirates National Oil Company, the sole supplier of oil, fuel, and petroleum is a monopolistic firm.

1. A single firm in a perfectly competitive market would choose to set the price equal to the market price as a strategy for obtaining customers. The market is characterized by many firms offering similar products making competition high (Farronato & Fradkin, 2015). The companies therefore are forced to price their products at the market price in order to benefit from normal profits. If the products are sold at a price higher than the market price, the product will not sell since buyers will prefer buying from other firms. The single firm in a perfectly competitive market is a price taker because sellers are many and buyers seek to maximize their utility by buying at lower prices. If a firm sets its price below the market price, the firm will risk going in to a loss since the selling price might not cover the production cost.

References

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge.

Farronato, C., & Fradkin, A. (2015). Market structure with the entry of peer-to-peer platforms: The case of hotels and Airbnb. Work. Pap., Stanford Univ.

Miller, R. L., & Benjamin, D. K. (2017). Economics of macro issues. Pearson..

Wooldridge, J. M. (2015). Introductory econometrics: A modern approach. Nelson Education.