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Column: Does minimum alcohol pricing make (economic) sense?

Basic microeconomics teaches us that price controls are a bad policy decision and alcohol is no exception to the rule, writes Luke McGrath.

Luke McGrath

MY WORD, economists do talk a load of rubbish sometimes and it can be hard to listen to them debate about technicalities, ideology and empirical evidence but price controls are one area in which there is a consensus and it’s very hard to argue against them. I’m going to start by ruining the ending of this piece by answering the opening question with a big NO, here is why.

It is an indirect tax, to be more precise and to delve into economic theory, it is a Pigovian tax, that is to say, a tax to stop/reduce society’s consumption of a good or engagement in an activity that negatively affects society or in “economics speak” causes a negative externality, the negative externality would be the price society pays (through taxation) for health care as a result of alcohol consumption. It is also a regressive tax which means it hurts the least well off more than the wealthy.

This is Christopher Snowdon’s (a fellow of the Adam Smith Institute) view.

“All indirect taxation is regressive, but minimum pricing is carefully calibrated to be as regressive as possible by targeting drinks that are disproportionately consumed by people on low incomes. Doctors on six figure salaries can rest assured that the champagne at the British Medical Association Christmas dinner will not be affected and the House of Commons bar will continue to be subsidised. Cheers!”

The black market

When you make a good artificially expensive a black market will usually emerge as the good can be sourced elsewhere cheaply and sold on for profit. The illicit cigarette market accounts for 25% of the market and at EU level counterfeit alcohol results in an estimated annual loss of some €900m to national Exchequers. (Retail Ireland)

If policy makers decide to go ahead with the control then they can expect a growth in the black market. It will not be too difficult to get cheap drink into the country as it can easily be bought in Northern Ireland cheaper than the Republic even before a minimum price. The effect could be catastrophic for the economy.

Dr Murray Rothbard puts it “Controls lead to distortions in the market system. Prices inform buyers and sellers of the relative scarcities of all products and encourage them to restore supply and demand. But manipulated prices distort these “signals” and create shortages. Black markets emerge to meet the demand of customers. Firms, that would be profitable otherwise will be pushed out of production or not enter it at all; other firms, that would be unprofitable, survive; impairing rational investment. This encourages calls for more government intervention.”

But wouldn’t it be good for society at large?

A minimum price on alcohol sounds great and socially desirable but when we look at the effects we see a darker picture. It has been debated and I myself was taught for the Leaving Cert. that alcohol doesn’t follow the law of demand (as price goes down I buy more of the good and when price goes up I buy less) and that alcohol is said to be price inelastic, (all this means is that when price rises demand may fall but not as much as say bread if its price went up. This is based on alcohol being an addictive good.)

More recent studies have argued that alcohol does follow the law but it doesn’t really matter in this case. If alcohol doesn’t follow the law of demand then all the government is doing is imposing a regressive tax that only affects the least well off in society and consumption won’t fall.

If alcohol does follow the law, consumption would go down but the fall would be relatively small and people would end up spending more to get their fill, again the effect is the least well off in society get hit. The government’s response in this case would be that they have increased the health benefits for society, however, my point would be to the logic behind the government’s argument in this case which would be “we must tax things that will harm the health of society” that line of thinking would lead to minimum prices for a bag of chips, fizzy drinks, crisps, chocolate etc., that really would be the definition of the nanny state.

Individuals should be allowed to make their own decisions on what they consume or forego consuming and should not be influenced by prices being artificially high or low for that matter by the government. The government would be better off using education and health promotion tools to get across the message that binge drinking can cause serious health damage. Society cannot gain from a reduction or distortion in choices it can only lose.

What do advocates say?

Some say that the increase would dissuade consumption of cheap alcohol, thereby reducing the social costs associated with drunken anti-social behaviour amongst young people. The problem with this line of thinking is that they are assuming that alcohol is a normal economic good, it is not, we have established that there is a debate about if it follows the law of demand but there is no doubt that it is price inelastic and that it does not suffer from diminishing marginal utility (which is a fancy way of saying that as we consume more of a good we are less satisfied by extra units of that good i.e. let’s say you have six cups of tea in a row the sixth is certainly not a nice as the first, alcohol is different, the sixth pint seems just as nice as the first) indicating that we will still drink as much as we do now but will have to pay more for it which will lead to purchasing less of other goods decreasing our welfare.

It is argued the policy is well targeted in tackling the types of alcohol that lie at the heart of the anti-social behaviour and demands upon emergency services, since these issues largely come about through younger people drinking cheap strong cider and lager. Let’s think about what happened when prohibition came into law in America and a black market evolved what was produced? Lager/ beer/ cider? No, hard liquor vodka and whiskey as you could get more “bang for your buck” the same logic applies here if minimum prices are too high. What would you rather youngsters drinking strong cider or strong whiskey?

Politicians seem to believe the policy could be good for pubs, by encouraging those who might otherwise buy cheaply priced alcohol from supermarkets to go to the pub to drink. This is flawed logic as Chris Snowden puts it “minimum pricing will not make beer any cheaper in pubs. It will merely make everybody a little bit poorer so they have less money to spend in pubs.”

Context

The context is very important here as you would imagine that we must have huge growth in alcohol consumption and thus we are having discussions on how to solve this growing problem, but this is simply not the case, alcohol consumption has been on the decline for a decade. Alcohol consumption declined by 12.5% between 2007 and 2012 and has fallen by 19% since consumption levels peaked in 2001. The current average consumption levels are at 11.68 litres of alcohol per adult per annum, which amounts to a decrease of 0.5% on last year’s figure. (Drinks Industry Group of Ireland)

Basic microeconomics teaches us that price controls are a bad policy decision and alcohol is no exception to the rule. We have established that whatever way you view it the least well of in society will bear the burden of a minimum price and considering alcohol consumption is falling the government should surely be trying to tackle other issues in society like junior doctor’s hours or the unemployment rate.

Luke McGrath is 22-year-old aspiring economist and a final year commerce student specialising in economics at NUIG: find him on LinkedIn.

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Luke McGrath

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