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Alcohol abuse is related to loads of problems that cost society billions of dollars each year. Many direct and secondary costs are associated with alcohol abuse. It is difficult to measure the costs resulting from alcohol abuse directly, and especially those resulting from the productivity losses, those costs are enormous (Rice et al, 1990). Alcohol abuse also causes costs in terms of pain and suffering to both those abusing and those affected by them. In addition, the high cost of injury related to alcohol abuse can only be estimated.

Alcohol abuse also brings costs coming from the adverse effects of alcohol consumption on health. The health related costs of alcohol abuse go to expenditures on medical treatment, a large proportion of which cater for the consequences of alcohol abuse. The other costs of alcohol consumption are incurred due to the losses to productivity and the losses to society. Alcohol abuse leads to premature deaths. In addition, alcohol consumption causes other medical conditions that require secondary diagnosis, thus costing more (Rice et. al., 1990).

Solutions to Alcohol Abuse

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Providing a solution to alcohol abuse is a case of negative externalities, both in production and consumption. This takes into account the negative effect on a third party, which is referred to as a social cost. Many negative externalities are related to the environmental consequences of production and consumption. Production of alcohol causes the environmental pollution (Saffer & Chaloupka, 1999).

Following the Coase theorem, an efficient result is achieved regardless of the presence of property rights allocated initially. They can bargain for the compensation without the government’s intervention if the cost of negotiation is not high. Matching the negative externality to the victims produces an equivalent tax allocation to the product in an extended market. Pigouvian tax is also an efficient way to correct negative externalities. Applying Pigouvian tax to alcohol will provide a proper incentive to reduce the negative effects of alcohol consumption (Temple & Paul, 1998).

The Effect of Prescription Drugs on the Demand and Supply of Other Products and Services

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Prescription drugs are those regulated by the government through legislation. They are not sold over the counter. Their price will go with the cost of health care in the country, which affects the price of many other products and services. If the cost of prescription drugs is high, the demand and supply of other related goods and services will also be high (Petri, 2004).

The Elasticity of Demand

The price elasticity of the demand measures how the demand responds to a price change. The demand changes with preferences, social and psychological factors that affect the desire of any goods. When an increase in price leads to a decrease in quantity demanded that is proportionately larger, the demand is said to be elastic. The demand is inelastic when an increase in price does not reduce the demand, especially so if there are alternative purchases (Petri, 2004). The demand elasticity is an important consideration when analyzing the impact of a shift in supply. For example, when the demand is inelastic, a tax increase on a product falls entirely on the consumer. Suppliers can, therefore, increase the price of a product, and the demand remains constant. On the other hand, if the demand is elastic, a case when a product has alternative purchases, the suppliers will have to incur the entire tax since the demand will decrease.

Supply Elasticity

The price elasticity of supply measures the change proportion in quantity supplied of goods or services when the price changes, all other factors are constant. The elasticity of supply is an important consideration when analyzing the impact of a shift in the demand (Petri, 2004). For instance, if the demand for rental apartments rises, there will be a shortage of apartments at the previous price, and therefore, rents will rise. The increase in the demand causes the rise in price; therefore, the supply increases to respond to these price changes.

Increasing-Cost Industries

The increasing –cost industry is the state of a perfectly competitive industry with a positively sloped supply curve which happens either due to a shortage of the factor of the production or due to an expansion of the industry that causes higher costs of the production and resource prices (diseconomies of scale). For example, with an increase in the demand in the software industry, buyers are willing to pay a higher price and this makes the existing firms increase their quantities (Temple & Paul, 1998). This has prompted the entry of new firms, and the supply curve shifts. The industry will have a positively sloped supply curve because the wages of computer programmers have gone up, shifting the minimum production costs up. The textile industry, which is facing a shortage of labor, is another example. To increase the output, the industry will have to increase costs of production leading to a positively sloped supply curve.

The Economic Efficiency of a Perfectly Competitive Market

A perfectly competitive market is one that no participants have a market power to influence the price of a product. A perfectly competitive market is economically efficient because it does not limit consumers as long as they are able and willing to purchase the homogenous product at a certain price. Similarly, producers are not limited as long as they are willing and able to supply at a certain price (Petri, 2004). It allows for adjustments in the changing market conditions since factors of the production are perfectly mobile in the long run. The product does not vary across the market, and the price and quality of the product are known to all consumers and producers. This ensures that all parties in the trade are better off.

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