Thursday, July 17, 2008

A minimum price for booze

This is a cute microeconomics task.  From an group email sent to me by NCETA's Dr Anne Roche:

‘The National Centre for Education and Training on Addiction (NCETA) has been contracted by the Australian Government Department of Health and Ageing to conduct a feasibility study on setting a floor price for alcohol products. This study is being conducted nationally to determine if state and territory governments, working in conjunction with liquor licensing bodies, can introduce a floor price to control high-risk alcohol consumption.
For the purposes of this study, an alcohol floor price is defined ‘as a minimum fixed price per standard drink applied to all alcohol products in Australia’. Please note that an alcohol floor price is not a synonym for an increased levy or tax on alcohol. It is a distinct and unique strategy’.
The move is presumably an effort to stop heavy boozers from drinking themselves silly on cheap flagon wine. In a sense it is an imperfect surrogate for volumetric pricing. The latter identifies ethyl alcohol content as the prime cause of alcohol’s social costs and advises taxing accordingly in accord with the alcohol content of booze.

A key issue is how a minimum price would compare with a volumetric tax. One obvious effect is that the tax revenue would accrue to the government rather than as revenue to the booze companies.

The effect of a minimum price would be to force a switch towards better quality booze whose price lies at or above the minimum away from booze that is currently priced below the minimum. There would also be a reduction in overall consumption.

The measure would have very regressive impacts and will undoubtedly be criticized by non-thinking social worker types on these grounds. (It’s a dumb argument because regressivity should be assessed from the viewpoint of the total impact of the tax-transfer mix, not the impact of a particular tax).

It might restrain limited income youth from experimenting with booze which might be a good thing.

It would presumably foster the creation of homemade brews which might have some health and other costs.

It might encourage substitution toward non-alcoholic intoxicants via activities such as petrol sniffing and smoking cannabis.

It would reduce problem drinking by those with drinking problems though the precise effects are a matter of evidence. Dependent drinkers might often be income-constrained but their compensated price elasticities are likely to be low in any event. It is an empirical question which of these effects works harder.

NCETA are seeking submissions on this. If we got some good comments and some bright ideas we might send in this blog post as a joint contribution. What are your views on this proposal?


Pablo said...

I think this proposal could decrease consumption in the short-term, however, it will not be taking care of the root problem: lack of education. There is a belief that you drink to have fun, and you have fun only when you drink. This is a fact that could even have implications when trying to socialize if you are non-drinker.
Placing a higher price for drinking is like paying a charge when you forget to return a book in the library, everybody ends up returning the book whenever they want cause paying the fee allows you to do so.
We need social commitment and understanding of why we should not drink.

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