The surprising effectiveness of minimum unit prices on alcohol

About this event

All OECD countries have policies that aim to reduce the externalities associated with alcohol consumption. Policies that increase the price of alcohol face the inherent trade-off of reducing externalities while minimising allocative distortions. Scotland and Ireland have recently introduced minimum unit prices, and other countries looks set to follow suit. Advocates of the minimum unit price argue that it targets alcohol misuse and problem drinking (while limiting the impact on light and moderate drinkers), because it raises the price of cheap alcohol, which is disproportionately purchased by the heaviest drinkers. Economists have been critical of this policy; price fixing is illegal in competition law, which includes agreements not to sell something below a minimum price, and it leads to substantial transfer from government tax receipts to industry revenues. When the externalities from alcohol consumption are homogeneous, a tax levied on alcohol content is more efficient than a minimum unit price. However, if externalities are heterogeneous (e.g. if the marginal cost of drinking is larger the more someone drinks), then the relative effectiveness of policies depends on how those who generate different externalities respond to policy intervention. We find that, in the UK, if externalities are sufficiently concentrated among heavy drinkers, then a minimum unit price is more efficient than a flat tax levied on alcohol content.