Wednesday, February 3, 2010

The Low Cost of Drinking

Does cheap liquor encourage excess?

Last year, Sir Liam Donaldson, the Chief Medical Officer in England, touched off a storm of controversy with his call for a government-mandated minimum pricing schedule for the sale of alcohol.

Donaldson’s pricing plan would set a minimum of 50p per unit of alcohol, or roughly 80 cents. This floor on alcohol pricing would mean that a bottle of wine could not be sold for less than $7.20, a bottle of whisky for less than $22, or a six-pack for less than about $9.50. Such a measure would effectively double the price of the cheapest alcohol sold in some discount supermarkets.  Sir Liam Donaldson and other health officials have pointed out that, while alcohol consumption in many European countries has fallen since 1970, consumption in England has increased by 40%.

 Sir Liam estimated that the pricing minimums would save more than 3,000 lives and result in 100,000 fewer hospital admissions per year.

Further roiling the waters was a London Times article in December titled “Alcohol now costs less than water.” The Times found that cut-price deals at British supermarkets were endemic. Don Shenker, chief executive of Alcohol Concern, said that supermarket discounting was undermining the government’s efforts to curb binge drinking in the UK: “The evidence shows young people and harmful drinkers are drawn to very cheap alcohol.” The British Medical Association also threw its support behind a crackdown on deeply discounted alcohol sales.

However, Prime Minister Brown announced his government’s opposition to minimum pricing, arguing that the proposal would penalize the majority of sensible drinkers due to the actions of a few. It was also suggested that the measure might be illegal under EU competition laws.

As it turned out, alcohol was only cheaper than water if you bought the most expensive water and the least expensive booze. But no matter—the point had been made. “We have a huge problem with alcohol abuse in the UK,” said a spokesperson for the British Medical Association, “so we want a clampdown on these cut-throat price deals.”

Scotland also announced it was considering a minimum pricing plan. However, a study by Deloitte Research, reported in the Herald Scotland, found that only one out of five adults would be likely to buy less alcohol under a minimum price system.  52% said they would spend more money for the same amount of alcohol or else seek out cheaper brands.  In addition, the Deloitte research suggested that people use cheap supermarket alcohol for “pre-fueling” or “pre-loading” before going out for the night.  Scotland’s alcohol intake per person is higher than Britain’s. Recently, the Scottish government released a report from the University of York, which estimated that alcohol abuse cost Scottish taxpayers almost $7.5 billion a year.

British Health Secretary Andy Burnham told the UK Telegraph that while he did not wish to “punish the majority of people who drink responsibly,” he maintained there was no argument about “the link with price and people drinking harmful levels of alcohol—there is no debate about that.” Government officials note that the imposition of some form of levy might be required to keep the drinks industry from reaping windfall profits from a price increase. To date, the British Cabinet has taken no formal action on the matter.

Starting in April, British pubs and clubs will be banned from running “all you can drink” nights and other “irresponsible drink promotions,” according to The Independent. The plans have met with stiff opposition from pub owners, the alcohol industry, and the public.

All of this may be in vain: The demand for alcohol, in economic terms, may be highly inelastic, like the demand for cigarettes and coffee. Price hikes for those two items over the years have not been accompanied by similar declines in usage.


Anonymous said...

The concluding sentence is simply incorrect. It has been clear for some time that cigarette consumption is price elastic, with higher elasticity among the young and poor. The only differences between the studies is the value of the effect, not its existence or direction.

Dirk Hanson said...

Opinions vary. Some would argue that since nicotine is addictive, consumers cannot substitute some other brand or variant, and therefore will pay for nicotine even if clove cigarettes are real cheap. Pushing up the price also has the effect of creating or sustaining a black market for cigs.

Some degree of elasticity among the young and poor makes sense, as with alcohol, but a change in cigarette price does not immediately trigger a general drop in consumption, so far as I am aware.

Dirk Hanson said...

Addendum: While not always and everywhere the case, there ARE in fact examples where a price increase created an immediate drop in cigarette sales. Unfortunately, we don't know whether the decrease I discussed in the post below continued beyond 12 months, or the extent to which smokers found cheaper places to buy cigarettes and soldiered on.

Steve Clay said...

Kleiman always mentions Philip J. Cook's "Paying the Tab" which apparently suggests that even small cost increases reduce drinking for those who're drinking too much, and I think that's a good point to make. Even if a culture drinks more on average, it's likely the most heavy drinkers who do the most damage, and they'll be impacted by even small price increases.

Steve Clay said...

So to answer the question "Does cheap liquor encourage excess?" Probably not for most, but yes for the heaviest drinkers, which is why it's still bad.

Dirk Hanson said...

Certainly we can agree that cheap, fortified wines like Night Train and Thunderbird in the U.S. were designed specifically to appeal to street alcoholics with low or no incomes.

KennethEckersley said...

The usual laws of supply and demand can never apply to addictive substances as history has shown. Increased prices produce only a temporary slowing of sales followed by a return to the usual demand.

Furthermore, high prices provide greater opportunities for terrorist and criminal smugglers and alcohol high-jackers to operate a cut-pice illegal market and still make huge profits.

The answer is for the government to collect their tax by licensing drinkers in the same way as we license drivers, and then reducing retail prices to rock bottom to sqeeze out the illegal trade.

Kenneth Eckersley, C.E.O. ARTS.

Anonymous said...

First commenter again. Not to beat a dead horse, but this isn't the sort of question where we need to rely on opinion and argument because we lack for good data and quality analysis. The question of whether cigarette consumption is price elastic is exactly the sort of query that econometricians love to tackle, and a number of quality studies have been published in the peer-reviewed literature. Almost all find that when prices go up, consumption goes down.

Somewhere along the line we got the idea that demand for addictive substances isn't price elastic, but it's simply not true. It might be less elastic than other goods, and there's going to be some substitution, but the demand curve still slopes downward.

Don't take my word for it; give Google Scholar and Medline a gander.

Dirk Hanson said...

From Choices Magazine, 1st quarter, 2004, by Kitty Kay Chan and Tom Capehart, economists with the Economic Research Service, United States Department of Agriculture, Washington, DC.

Higher prices increase costs to consumers and discourage cigarette consumption. As the price of an item increases by a certain percentage, consumption of the item falls. The percentage decline in consumption caused by a percentage increase in price is measured by price elasticity of demand. Price elasticity of demand can help show that some of the decline in cigarette consumption can be explained by higher prices, but most of the decline is attributed to expanding health concerns.

According to the Surgeon General's Report on Reducing Tobacco Use, most studies provide an estimate between -0.3 to -0.5 for price elasticities of demand for cigarettes. For instance, Lewit and Coate (1982), using the 1976 National Health Interview Survey, reported an estimated price elasticity of -0.42. Chaloupka and Wechsler (1997), using the Harvard College Alcohol Study, reported an estimated price elasticity of -0.58. The studies in the Surgeon General's Report on Reducing Tobacco Use apply various theoretical and empirical modeling techniques. Traditional demand and rational addiction models are the most commonly used theoretical frameworks. Studies on cigarette demand examine both aggregate data and individual level data. Regardless of the use of various modeling techniques and data structures, price elasticities of demand for cigarettes in the United States are inelastic (Bradford, 2003).

Anonymous said...

Hi Dirk,

I'm not sure what that excerpt is meant to show. Chan and Capehart surveyed the research and reported that when price goes up consumption goes down. The last line you quoted, where the authors cite Bradford, is inartfully worded, but it is not saying the opposite. As Bradford reports, "As can be seen in Table 1, price has a significantly negative effect on smoking participation and the quantity of cigarettes consumed, as theory would predict."

Bradford examined whether these effects were different based on pregnancy status, and found that they weren't. That is, the inelasticity he's noting was that of pregnant/non-pregnant, not price/consumption.

Dirk Hanson said...

Only meant to suggest that some economists run the numbers and end up with a value indicative of some degree of inelasticity, vs. pure elasticity.

I'm no economist, but I suppose a number of products show a mix of both, depending on time, place and circumstance. I do think, however, that addictive substances represent a special case, and I am not convinced that the price/demand equations of nicotine, heroin, or cocaine follow the typical rules of a product with typical elastic demand.

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