The New Minimum Price for Alcohol

(by Bruce Lyons) In a post last May, I discussed the dangers of using minimum prices to reduce binge drinking.  I suggested that any minimum price set greater than cost (inclusive of tax) could be highly damaging to competition and actually promote alcohol consumption by incentivising marketing activities.  Today, the government announced its proposal to prevent retailers from selling at less than the tax element of cost.  This clearly meets the cost criterion and should not be anti-competitive.  It limits cross-subsidisation and can be viewed as a way to ensure an efficient tax system justified by the negative externalities of binge drinking.  So far so good, but there is a serious danger.  Many will see this proposal as a toehold to establish the mechanism for enforcing a minimum price which can be ratcheted up in the future (other than by raising taxes).  This would be a bad idea but it will take strong political leadership to keep to the cost rule.

P.S.  This measure confirms cider as the cheapest form of alcohol because it is lightly taxed – the legacy of an earlier government’s pledge to support apple growers.  This may be an unusually British way in which agricultural policy might indirectly lead to chaos on the High Street – not from protesting farmers but from young consumers of their product!

3 Responses to The New Minimum Price for Alcohol

  1. Pete says:

    Why would the government want to raise the minimum price other than by raising taxes? My instant reaction was that the concern should go the other way: having established that the tax on alcohol is a Pigouvian tax, the government jumps on even the most spurious evidence of economic harm caused by alcohol so that it can raise more revenue.

    Is there some mechanism here I’m not understanding?

  2. Bruce Lyons says:

    On your first question, I agree this would be foolish. However, my May post was stimulated by Tesco’s kind offer to accept a minimum price for alcohol (implicitly without any tax rise). This would generate unjustifiable profits to be shared between retailers and manufacturers and with no benefit to taxpayers. It nearly happened in Scotland and there are lobby groups suggesting that minimum prices without a tax rise can stop binge drinking without affecting the moderate drinker with sophisticated tastes. On your second question, I take your point about the potentially spurious link between an economically quantified externality and the tax level set politically. If you are right, it would be another danger associated with this currently modest policy.

  3. Pete says:

    Thanks Bruce. I completely missed the point about drinkers of more expensive alcohol. Obviously alcohol taxes hit them in a way that minimum prices don’t. Presumably they’re also more likely to vote, and more likely to want to see something done about binge drinking.

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