Question

The government is considering two policies for reducing alcohol consumption. One policy limits the number of alcoholic drinks that a bar can serve a patron in an evening to no more than three. The alternative taxes alcoholic drinks enough that patrons limit themselves to no more than three drinks per night.

True or false: The first policy (restricting consumption) is less profitable for sellers than the second policy (taxing).

Answer 1

The given statement is false, because the first policy is more profitable than the second policy. This is because the first policy puts a restriction only on the supply, limiting it to a cap, keeping demand same at the same prices upto those quantities.

However, in the second policy, no consumer would choose to buy more than 3 drinks himself, so the maximum possible quantity sold is still the same as in the first policy, but now, because the price to customers has effectively increased for all units of consumption even before the ceiling of 3 drinks is effective, they will themselves cut down on their consumption, and hence, there is lost sales for the seller, thus keeping revenue lower than that from the first policy, because the revenue generated per drink is still the same.