The impact of the proposed Indonesian alcohol ban on price and quantity

In my ECONS102 class, we will be introducing the model of supply and demand this coming week. It's a pretty powerful tool for understanding the qualitative changes in price and quantity that can arise from policy changes. Here's one example, as reported by the New Zealand Herald back in November:

Indonesia's House of Representatives will resume debate on a controversial bill that would see consumption and distribution of alcohol banned across the country, including in the tourist mecca Bali.

Politicians linked to the Islam-based United Development Party have filed a request with Parliament to resume deliberation on the Prohibition of Alcoholic Drinks Bill which was first introduced in 2015 but has stalled.

Consider the market for alcohol in Indonesia, as shown in the diagram below. Initially, the market is operating at equilibrium, where the demand curve D0 intersects the supply curve S0. The equilibrium price is P0 and the equilibrium quantity of alcohol traded is Q0. If the alcohol ban is introduced, that would make the consumption of alcohol illegal. That would make at least some consumers less willing to consume alcohol (the net benefit of consumption would decrease because of the risk of penalties for engaging in illegal behaviour, which could be quite severe), so the demand for alcohol would decrease to D1. The ban would also make distribution of alcohol illegal. Alcohol sellers would face higher costs (due to the risk of getting caught and punished), and this would decreases the supply of alcohol to S1. 

The new equilibrium after then ban is introduced occurs where the demand curve D1 intersects the supply curve S1, The equilibrium price is P1 and the equilibrium quantity of alcohol traded is Q1. The quantity of alcohol traded definitely decreases. However, the change in the price of alcohol is ambiguous. As shown in the diagram, the price could decrease - that happens if the decrease in demand is bigger than the decrease in supply. However, if the decrease in demand was smaller than the decrease in supply, the equilibrium price would increase. And, there is a small chance that the decreases in demand and supply exactly offset each other, in which case the price would remain at P0.

The ambiguous effect of the alcohol ban on price might seem surprising, and many people would probably expect price to increase. However, that potentially ignores the role of lower demand in suppressing the price. One of the important lessons to learn from the model of supply and demand is to never reason from a price change. The price (and quantity) are the outcomes of the supply and demand model, so they usually are the end point, not the beginning.