Evaluate Possible Economic Policies

Evaluate possible economic policies, other than increasing the age limit, that a government might use to reduce significantly the consumption of alcoholic drinks.

The market mechanism should allocate scarce resources to maximise consumer welfare. Alcohol is an example of a demerit good. A demerit good is one which is overprovided by the market mechanism. Apart from alcohol, drugs and prostitution are also examples of demerit goods. Consumption of these goods produces large negative externalities. Crime increases, health costs rise, valuable human economic resources are destroyed, and friends and relatives suffer distress. Moreover, individuals themselves suffer and are unable to stop consuming because demerit goods are often addictive. Therefore it can be argued that consumers of these goods are not the best judges of their own interests. As a result, governments intervene to correct this market failure.
The government has tentatively proposed a minimum price for a unit of alcohol at 45p. A minimum price is mainly aimed at preventing the sale of very cheap alcohol by supermarkets. The hope is that a higher price will discourage binge drinking, improve health, and make people pay the true social cost of alcohol. Opponents argue it is unfair and a regressive price which will hurt the living standards of those on low income.
It is recognised that the UK has a problem with binge drinking. Overconsumption of alcohol can lead to many social problems, such as increased crime, increased accidents. It contributes to a variety of health problems such as premature death, cirrhosis of the liver, heart disease, cancer, alcoholism, and mental problems. All this places costs on the NHS, which have to be borne by the tax payer. The UK’s alcohol problem is much worse than most European countries, like France. According to the ONS, in 2010/11, there was an 11 per cent increase on alcohol-related (hospital) admissions giving a total of 1,168,300 admissions. This is more than twice as many as in 2002/03 (510,700). Academics say that total deaths from the “wider harms” caused to society by alcohol could reach 250,000 in England and Wales by 2019 if current trends continue. (250,000 deaths from alcohol). According to a report, “Health First: An evidence-based alcohol strategy for the UK”. “The personal, social and economic cost of alcohol has been estimated to be up to £55bn per year for England and £7.5bn for Scotland,”
The 45p minimum would mean a can of strong lager could not be sold for less than £1.56 and a bottle of wine below £4.22.Research carried out for the government shows a 45p minimum would reduce the consumption of alcohol by 4.3%, leading to 2,000 fewer deaths and 66,000 hospital admissions after 10 years. Researchers also claim the number of crimes would drop by 24,000 a year. In addition, the biggest effect is amongst young ‘binge’ drinkers who are most price sensitive.
Controversially, some politicians have argued it would reduce living standards for those on low incomes. The minimum price is highly regressive and will affect those on low incomes the most. There is already substantial tax on alcohol. Additionally, a higher minimum price could encourage people to switch to illicit ‘home brews’ and replacement alcohol, this is potentially dangerous as it leaves people exposed to alcohol of an unknown quantity and composition. It will also be an easy way for supermarkets to increase their profits. Some say that the government would be better off just increasing tax on alcohol so that society pockets the extra cost rather than supermarkets. Then the tax revenue raised could be used to fund the cost of treating alcohol related diseases.
An increase in indirect taxation would cause the supply curve to shift to the left and, therefore, pushing up the price of a product.
Taxes, however, are difficult to implement efficiently. To cause a significant reduction of the alcohol consumption the tax level has to be significantly higher. For example, a 1% change in tax would not have a big impact on alcohol consumption. Moreover, if a change in taxes would be high, it could lead to an increase in alcohol import from other countries, or black-market. The price elasticity of demand, i.e. the responsiveness of demand to changes in the price of a product, is another factor affecting the results of taxation. If demand for alcohol is inelastic, higher taxes will not reduce the demand significantly.
Apart from raising the price per base unit for Alcohol, advertising is often considered a factor which affects the demand for this demerit good. Advertising for alcoholic beverages is regularly under government scrutiny. Regulating and reducing the visibility of alcoholic beverages is seen as a convincing public health policy measure to reduce alcohol-related harm. Contrary to the general belief, alcohol advertising does not create the desire to consume, therefore banning advertising will not significantly reduce overall consumption, and alcohol-related harm will not automatically decline.
In a mature market, the purpose of marketing is to encourage competition between brands, not to influence consumption of a product category. An increase in car advertising, for instance, will not lead to an increase in car purchases. It will however influence car buyers to choose between different brands and models. Evidence indicates that while advertising does not increase overall consumption of alcoholic beverages, it does have a measurable impact on market share for brands and substitution between brands. Marketing and advertising create brand awareness. In a mature market such as the one for alcoholic beverages, it merely encourages competition between brands, which is both stimulating for the economy and beneficial for consumer choice.
Subsidies are often considered when the topic of reducing the consumption of alcoholic drinks is raised. A subsidy is a payment paid by the government to a producer which aims to reduce their costs and increase output. The effect of a subsidy is to increase supply and drive prices down, if all things remain equal (ceteris paribus). In terms of correcting market failure this should raise demand to the level it should be at if the benefits of consumption were taken into account, this can be seen as a correction of market failure as under consumption of merit goods can lead to a loss of social welfare. One issue with subsidising an industry is that they can become over reliant on the subsidy and therefore become inefficient as a result, leading to a delay of economic reform. In addition to this, lower prices are not beneficial when trying to reduce consumption of demerit goods, as lower prices lead to an increased demand in the good.
Thirdly, a government could implement regulations on the alcohol consumption. For example, it could ban public drinking and/or limit the times of alcohol sale (e.g. people could buy alcohol only in the afternoon). This would lead to lower consumption of alcohol only if it would be followed by everybody and guarded by the police. It could also encourage people to go to pubs and bars instead of drinking in public places but would not decrease the consumption significantly.
Moreover, a government could prepare information campaigns and events on the negative externalities of drinking, such as higher criminality and unemployment. It could educate people about the possible negative results of drinking and encourage them to limit their alcohol consumption. It would also lead to limiting the imperfect information problem. People should be also aware that over consuming alcohol which a demerit good, i.e. a good which has been found through the political process to be socially undesirable, causes harm to them (e.g. liver cancer, addiction). These actions could result in significant changes, especially in the long-term and, therefore it is difficult to assess their helpfulness in a short period of time. Educating the public takes a long time and has to last for many years. However, alcohol consumption is often considered as a part of tradition and culture and therefore it will be difficult to limit it.