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Should there be minimum prices set on alcohol?

The House of Commons Health Committee has just called for minimum prices to be set on alcoholic drinks. They are concerned at the negative external costs which the use of alcohol generates, and suggest that a minimum price of 50p per unit of alcohol could save about 3000 lives a year. They estimate that the total cost of the misuse of alcohol in terms of violent crime, health issues and death amounts to £55bn per year.


Their arguments in favour of a minimum price are basically as follows:

  • It would affect most of all those who drink cheap alcohol, in particular young binge-drinkers and heavy low income drinkers who suffer most from liver disease
  • It is estimated that a minimum price of 50p per unit would save over 3,000 lives per year, and of 40p 1,100 lives per year.
  • Unlike rises in duty (which could be absorbed by the supermarkets’ suppliers and which affect all sellers of alcohol) it would benefit traditional pubs and discourage pre-loading.
  • It would encourage a switch to weaker wines and beers.

It is worth having a look at some of the statistics contained in the report which look into the economics of minimum prices including elasticities. This area of the report can be accessed here.


Should the government impose a minimum price on alcohol?

Should the government impose a minimum price on alcohol?


Some retailers have pointed out the differing price sensitivity towards alcohol in various countries. For example, Finland has very expensive alcohol but also a severe alcohol problem. By contrast, France and Spain have relatively cheap alcohol, but lower levels of problem than in the UK. However, the Committee counter this by arguing that although there are different responses to price levels in different countries, price rises in any country will be followed by a fall in demand. Therefore a rise in price above equilibrium through a policy of minimum pricing would still reduce demand.


There is also the argument that the heaviest drinkers, who are the ones who generate the greatest external costs, are the very group who will be least sensitive to price. If the price of alcohol goes up there will be a substitution effect towards cheaper forms of alcohol. In fact, figures show that 10% of the population drinks 44% of the total alcohol consumed. However, the Committee argues that if the price of alcohol rises it will be a significant deterrent for those on low incomes and for young people, and will give rise to less crime-related activity and premature deaths.


The Committee also quotes Treasury figures on elasticity which have been estimated to evaluate the effect of duty rises on demand and therefore the amount of government revenue received. A whole range of alcohol types are quoted in the Report, but for example, the elasticity on beer consumed in pubs, shows that a 1% rise in price will reduce consumption by 0.48%. Therefore, they argue, that price rises will curb demand.


Finally, they tackle the argument that an increase in minimum price will simply boost the profit margins of retailers and other suppliers and allow them to increase their marketing spend. The Committee therefore calls for a continued increase on alcohol duty year-on-year on top of a minimum price.


We will have to wait and see whether the government will intervene to correct what is perceived as a market failure.

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Posted in Elasticity, market failure, Minimum pricing

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