The UK Government is looking to introduce a minimum price per unit for alcoholic drinks. The price muted is 45p which would make a relatively strong can of lager approximately £0.95. Currently a local supermarket is retailing a brand of lager containing 2.1 units per can at the equivalent of £0.75. Under the new legislation, should it come into force, the equivalent box of ten cans would have to be sold at a minimum of £9.46. More of which later. However, why do we need to introduce a minimum price for alcohol?

1. Bill Morrison Head of Economics & Business Studies, The Grange School Hartford, Northwich January 2013
Will a minimum price for alcohol work?
Reports today (28 November 2012) suggest me, will look to maximise our utility (which I often
that the Government is looking to introduce refer to as happy value) by consuming our goods and
a minimum price per unit for alcoholic services in such a combination that we consume up
to the point where the marginal benefit of the last
drinks. The price muted is 45p which would unit consumed is equivalent to its marginal cost.
make a relatively strong can of lager What we fail to do is take into account the impact
approximately £0.95. Currently a local of our actions on third parties. Sometimes our
supermarket is retailing a brand of lager consumption has a positive impact and results in
containing 2.1 units per can at the equivalent positive externalities, such as our consumption of
of £0.75. Under the new legislation, should education. However, often our actions can impose
it come into force, the equivalent box of ten negative externalities on third parties. For example,
driving our cars imposes pollution costs on third parties.
cans would have to be sold at a minimum A recent article in The Daily Mail suggests that pollution
of £9.46. More of which later. However, raises the probability of children being born autistic.
why do we need to introduce a minimum
price for alcohol? Whilst there are some positive externalities generated
in the consumption of alcohol, such as reducing stress
Students of Economics will, at some point, come and thus the potential costs to the NHS, it has been
across the concepts of social and private costs and widely reported that alcohol consumption in the UK
benefits. The rational economic agent i.e. you and is imposing a great deal of external costs on society.
Here are some of the statistics surrounding the
costs of alcohol abuse.
• The number of alcohol related deaths has more
than doubled since 1996 to more than 8,000
alcohol related deaths per annum.
• It cost the NHS over £2bn a year to treat the
chronic and acute effects of alcohol.
• In 2010 NICE reported that:
• Admissions to hospitals wholly attributable to
the result of drinking alcohol were 222,600,
with a further 640,700 partially attributable to
alcohol.
• There were 1.2m violent incidents.
• 360,000 domestic violence incidents.
• The cost to the tax payer was in excess of
£8,000m
• The cost of absenteeism from work was
valued at over £1,600m
Clearly, there is a major external cost associated
with the consumption of alcohol estimated at around
£12bn per annum. It would appear then that
something certainly needs to be done.
So the current proposal of 45p per unit may, on the
face of it, appear to be a good idea. Indeed, The
University of Sheffield research indicates that at
this price there would be 2,000 fewer deaths and
66,000 fewer hospital admissions in 10 years time.

2. Bill Morrison Head of Economics & Business Studies, The Grange School Hartford, Northwich
In fact consumption would fall by 4.3%. (Perhaps A minimum price is not a tax but a licence to print
the keen student would like to calculate the price money. The minimum price is a price hike that only
elasticity of demand given my price changes above!) the retailers benefit from. So the government
The question remains, however, will it work and what forgoes the revenue from an indirect tax that could
are the possibilities for government failure? be used to fund education about the harm, clinics
etc etc.
Firstly, the problem remains of setting the minimum
price at a level that will persuade drinkers to cut I am sure you can think of other issues surrounding
back. As I mentioned earlier the box of ten cans of this problem and I would urge you to investigate
lager would sell for £9.46. The same box has been alternatives such as education policy, indirect taxation,
on sale at ‘normal’ prices ranging from £11-£14. Is raising the minimum age one is able to purchase
this a sufficient differential for the determined alcohol and what do we do about the middle classes
drinker to cut back? who are drinking themselves to death at home at the
Secondly, what measures will be in place to stop t same time as the younger generation are partying
he development of black markets arising from the themselves to death binge drinking in the clubs and
smuggling of cheap booze from low cost countries? pubs of England and Wales. Note that we need to
(Although France is proposing a 160% hike in think about “happy hours” and buy one get one free
excise duty on alcohol.) deals that these outlets offer to entice the drinker
into their establishments.
Thirdly, alcohol, like cigarettes, can be addictive.
Arguably, those most at risk from liver disease and
an early grave are those who are alcoholic. This
addiction will make their price elasticity of demand
more inelastic leading to a greater proportion of their
income being spent on alcohol and running the risk
of them generating debts and potentially becoming
homeless.
Fourthly, steps would need to be taken to stop the
rise of boot-legging as occurred during prohibition in
the USA which led to the increase in illegal activities
of the gangster families and driving the drinking
problem underground.
Fifthly, what are the impacts on the drink industry?
Could it result in job losses in the manufacturing of
alcoholic drinks?
What about the impact on the poorer members of
society. Will they find the introduction of a minimum
price similar to the impact of a regressive tax?
(Although the IFS report suggests not.)
Finally, why is the market mechanism not working
correctly? If there is such a demand for alcohol why
aren’t prices rising naturally. Is it simply down to the
supermarkets using alcohol as a loss leader?
Shouldn’t they be acting more ethically?