05 October 2017 | Hodge Foundation Insights
An interesting article in Monday’s Western Mail suggested that a policy on minimum alcohol pricing was desperately needed in Wales. It also suggested that such a policy would be easy to introduce and the impact of the policy would be unquestionably positive. However, the arguments against such a policy were not highlighted in the article. In fact, the arguments are finely balanced and the policy may or may not be effective. In the interest of generating a debate on this important topic, let me present some of the arguments. Although excessive drinking is a social problem, we might question why some people feel that such a pricing policy is desperately needed in Wales in 2017.
Recent studies have shown that alcohol consumption has actually been falling in the UK for over a decade and binge drinking has become less popular, especially among young people. e.g. ONS data for 2017 show the proportion of adults drinking alcohol is at the lowest level on record: only 56% had had a drink in the week before being interviewed – a fall from 64% in 2005. Also binge drinking and harmful drinking have declined by 17% and 23% respectively since 2005. Indeed the proportion of young people who are teetotal has actually been rising over the period.
Evidence from Europe also questions the need for minimum prices. Across the EU, alcohol consumption is higher in France, Germany and Spain than in the UK. Also the number of alcohol-related deaths are greater in these countries and the consumption of alcohol is more widespread throughout society. But binge drinking is less of a problem in these countries despite lower prices for alcoholic drinks.
Binge drinking in countries like France appears to be a minor problem because the French drink in moderation – even though a bottle of wine can be bought for less than a bottle of mineral water. Evidence from France suggests that the low price of alcohol may not be the most important reason for binge drinking.
Perversely, alcohol prices are very high in some Scandinavian countries but these high prices have not eliminated binge drinking – indeed in Finland the problem is on the increase despite very high prices.
These examples indicate that binge drinking is a cultural problem and that the policy response may need to be focused more on changing drinking habits in Wales through advertising and education rather than on setting minimum prices. In other words, a similar policy response is needed to the one that successfully curtailed tobacco consumption in the UK – a mixture of advertising, education, social pressure and higher taxes.
In general, the anecdotal evidence on alcohol consumption does not appear to support a policy of setting minimum prices for alcohol. However, the question remains: Will minimum alcohol prices, if introduced, have the desired effect of reducing binge drinking in Wales? In my view, probably not.
For example, minimum prices that are set above the market price would cause demand to fall and supply to increase resulting in a surplus of ‘no-frills’, strong alcoholic drinks on the market. There will also be ‘pent-up demand’ or ‘repressed demand’ at prices above the market price. This is the basic economic theory of market prices. However, the ultimate success or failure of introducing a minimum price for alcohol will depend on how these anomalies work themselves out in practice.
On the demand side the first thing to ask is: who are most likely to reduce their purchases of alcohol as the price rises? Consumers who are most likely to reduce their purchasing because of higher prices are those who receive low ‘marginal utility’ from drinking – i.e. those occasional drinkers for whom the enjoyment of alcohol is marginal. So if a minimum price is imposed, the decline in overall consumption from higher prices may very well be achieved by a fall in demand by those consumers that are of least concern to policy makers –i.e. the occasional drinker for whom the health impact of alcohol is not a real issue.
If this analysis is correct then the actual increase in price that will be needed to deter ‘hardened drinkers’ could be very significant– i.e. far higher than the suggested 50p minimum per unit.
Also if the 50p minimum fails to have the ‘right effect’ in reducing alcohol consumption by hardened drinkers then there will be a clamouring by various lobbying groups to increase the minimum price. Indeed the risk is that prospective political candidates would use a pledge to ‘raise the minimum price of alcohol’ and it will become a political football – especially if the prospective rise in price appears to have little impact on the majority of voters. If hardened drinkers continue to drink then there could be continuous pressure on politicians to raise the minimum price.
In addition, if there is a continuing demand for drink at lower prices, how will this demand for cheaper alcohol be met? Illegal stills and illegal brewers could step into the market to supply hardened drinkers which would soon create a black market for alcohol and cause even worse social problems.
On the supply side, the Government would effectively be raising price levels and increasing profit margins for the suppliers and retailers of alcohol. [Perhaps that’s why the producing companies and the retailers are not actively opposing the policy?] It would be like bringing back ‘retail price maintenance’ for a small part of the drinks sector. But the main impact will be to create an excess supply of the cheaper types of alcoholic drinks. How will this excess supply impact the market? Will innovative measures be introduced by retailers to off-load this surplus alcohol onto the market – e.g. offers like ‘buy one get one free’? And remember that in the past, producers and retailers have introduced very innovative schemes to get around market restrictions on price.
Finally, in terms of social equity, it has to be accepted that a minimum pricing regime would be highly regressive – i.e. it would hit poorer households more than middle income households. It is certainly likely to be more regressive than simply increasing taxation on alcohol. However, the latter option would at least provide an income stream to the Government which it could use to launch an educational campaign aimed at tackling this deep-rooted social and cultural problem. At the end of the day, education is the only sensible long term solution.