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UNIVERSITY

OF PORTSMOUTH

Alcohol is unlike other goods and not a normal commodity; it displays the standard
characteristics of a private good. Excessive alcohol consumption is the cause of an
estimated 2.3 million premature deaths worldwide, and has a general negative effect on
society. For these reasons there are various policies implemented worldwide to try and
reduce consumption. These policies range from taxation and decreasing the availability of
alcohol to health sector intervention and raising alcohol awareness/education. The

The Effect of Pricing


Policies in Reducing
Alcohol Consumption
The Economists Toolkit 2 Literature review

following articles give an insight into the effectiveness of specific policies, focusing on those
involving price (taxation and minimum price). All reach agreement that increasing the price
of alcohol will decrease consumption. The articles each provide a slightly different insight
into the impacts that occur due to the pricing policies, and to try and guarantee that
unintended adverse consequences will not occur, such as creating an increase in demand in
the substitute markets of illegal alcohol and drugs.
Firstly, Parry et al. (2009) focuses on the fiscal and externality rationales for alcohol. An
analytical and stimulation framework has been implemented to assess optimal levels as well

as welfare effects of alcohol taxes and drunk driver penalties, accounting for how they

interact with the broader fiscal system. Parry et al. (2009) is the only article that has used

data from the US, in comparison to the other articles discussed which select data from the
UK. This allows an international comparison to be made, but the results should be taken

with caution as regulations and taxation varies from country to country. The model focuses

on conceptualising fiscal linkages and adopts a simplified treatment of the fiscal system, and

the researcher has acknowledged that this may cause an understating of the fiscal element
of the optimal alcohol tax. It is a static model which takes into account assumptions on
preferences, production, government and agent optimisation. Optimal tax and penalty
formulas are also considered, and parameter values include; baseline data, external costs,
elasticities and productivity effects. The results indicate the fiscal element of the optimal
alcohol tax level is quantitatively important and positive, due to the alcohol taxes in the US
being lower than their optimal levels. The revenue generated from taxes currently only
covers roughly a third of the marginal external costs; therefore from this research it can be
concluded that fiscal considerations significantly reinforce the case for increasing alcohol
taxes.


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Like the previous article, Purshouse et al. (2010) assess the effects of alcohol pricing and

highlighted that it is difficult for policymakers to know the true extent of externalities or to

pricing policy options. However, the research goes one step further, and shows great

even have the motivation to set minimum prices in accordance. Thus, there are problems in

consideration to the different consumer groups (separating them by age, gender and level

knowing the correct market price and why it makes sense to put minimum pricing

of alcohol consumption) type of beverages. The researchers constructed an epidemiological

regulations on a market that is already being taxed.

mathematic model to evaluate eighteen pricing policies, creating average and peak
consumption levels. Two models were formed; price-to consumption and consumption-toharm model. Risk functions were also applied to model the effect of consumption, disease
prevention for 47 illnesses and changes on mortality. The findings give evidence that an
increase in price causes a reduction in consumption, health-care costs, and health-related
quality of life losses in all the consumer groups. The researchers found that minimum pricing
policies are effective on the harmful drinkers group whilst reducing the effects on consumer
spending for moderate drinkers. The effectiveness of a minimum price policy increases
significantly in between 0.40-0.70, causing a reduction in mean consumption per week of
1.2%-11.3% respectively in the moderate drinkers subgroup and a reduction of 4.5%-24.1%
in the harmful drinkers subgroup. Also total bans of discounting in supermarkets and offlicenses were found to be effective, but prohibiting only large discounts had little effect.
Raising the prices in pubs and bars has the greatest effect on the 18-24 year old age group.
The overall conclusion is that minimum pricing policies and discounting restrictions both
estimate a reduction in alcohol consumption, and related health harms and costs, with

There are a number of similarities and differences between the three articles discussed.
Though each article suitably treats the research question of this literature review, the
proportion of relevant content differs in each study. Firstly, all agree that an increase in
price (through either taxation or minimum price) will decrease the amount of alcohol
consumed, the researchers merely employ different framework methods and look at slightly
different aspects of the good. The data in two of the three studies is captured in between
2007-2012; this aids easy comparison, as the data will be relatively consistent over this time
frame. However, Parry et al. (2009) uses data obtained from 2000, meaning the results
gained may not coincide completely with those from the other papers. Nevertheless, the
fact that the articles have all been published so recently further reassures the reader that
the conclusions reached within the studies involve the most recent developments on the
topic of the effect of policies on reducing alcohol consumption. This is supported by recent
news that incidents of violent behaviour in the UK have reduced; with some analysts linking
this to the rise in the price of alcohol leading to reduced consumption.
All three papers use slightly different methods to conduct their research. Craven et al.

increased drinker spending targeting those who incur most harm.


Lastly, Craven et al. (2013) take a different approach and explore the impact of enforcing a
minimum price for alcohol and the issues that will need to be resolved before it can be
effectively implemented. The researchers collected data from the UK on the trends of
alcohol consumption, affordability and hospital admission. In addition, international
comparisons were made about the level of alcohol consumption and the relative price
levels, from EU countries. The price elasticity findings show a 10% increase in the minimum
prices would reduce consumption between 1.5%-13.9% (dependant on alcoholic beverage),

(2013) and Purshouse et al. (2010) both have an emphasis on price elasticities in their
models. This is useful as both come to similar conclusions which verify the reliability of their
work in light of the research question. Parry et al. (2009) uses a representative agent
framework; this is commonly used in efficiency analysis and allows for many assumptions
and variables. The variations in methodology helps create different perspectives, the most
important thing however, is that it reveals different ways of establishing the impact which is
beneficial.

thus showing incentive to set a minimum price. The researchers also take into consideration

Purshouse et al. (2010) focuses on the change in mortality and disease prevalence for

the economic theory for external costs to be internalised by implementing Pigovian-style

alcohol related illness rather than economic impact of the increase in alcohol prices;

taxes, by raising prices and lowering consumption, helping avoid market distortions and

steering slightly away from the research question. The multiple focus in the articles means

discouraging switching alcohol beverage in response to relative price changes. However, it is


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less time is spent by the authors actually exploring the research question leaving room for

Bibliography

the other articles to be slightly favoured.


Craven, B., Marlow, M., and Shiers, A. (2013). The Economics of Minimum Pricing for

In conclusion, Parry et al. (2009) is the most suitable paper for answering the thesis, it

Alcohol. Institute of Economic Affairs: Vol 33: No. 2. Retrieved from:

focuses primarily on the impact of increasing alcohol prices to decrease consumption levels.

http://onlinelibrary.wiley.com/doi/10.1111/ecaf.12015/pdf

A critique would be that it only sheds light on alcohol consumption as a whole; it remains
unclear whether the impact of a pricing policy would have different outcomes depending on

Parry, I., West, S., and Laxminarayan, R. (2009). Fiscal and Externality Rationales for Alcohol

the beverage. Craven et al. (2013) touches on the elasticities of different beverages, but not

Policies. The B.E. Journal of Economic Analysis & Policy: Vol 9: Iss. 1, Article 29. Retrieved

in extensive detail, this could be a proposed line of further research. Furthermore, an issue

from: http://www.bepress.com/bejeap/vol9/iss1/art29

that none of the researchers appear to touch on is the markets/governments inability to

Purshouse, R., Meier, P., Brennan, A., Taylor, K. And Rafia, R. (2010). Estimated effect of

know the correct price to charge consumers and why it is logical to put additional taxation

alcohol pricing policies on health and health economic outcomes in England: an

or regulations on a market that is already taxed. In saying this, all of the articles are

epidemiological model. The Lancet: Vol 375: Iss 9723: Pages 1,355-1,364. Retrieved

enlightening and contribute to an overall appreciation of the effects of pricing policies on

from: http://www.thelancet.com/journals/lancet/article/PIIS0140-6736(10)60058-

reducing alcohol consumption.

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