Crampton on alcohol prices
Eric Crampton blogs:
Imagine that hazardous drinkers really really cared about the price of alcohol. If you increased the price of alcohol just a little bit, they’d stop drinking harmfully. Imagine further that moderate drinkers didn’t respond very much to prices: what does it matter to the rich Chardonnay-sipping set if a bottle is $8 or $40? If that were the true state of the world, we would have a very simple solution to alcohol problems: hike excise taxes. Harmful drinkers would stop drinking and would stop doing alcohol-related harmful things; moderate drinkers would pay more but that would just be tax revenue for the government. Since they wouldn’t change their consumption by very much, deadweight costs would be pretty small relative to the harms avoided. Yay taxes!
But is the assumption that heavy drinkers are more price response true?
Unfortunately, the world don’t quite look like that. Our best evidence on it remains Wagenaar’s metastudyshowing that heavy drinkers respond to a 10% price hike by reducing consumption by 2.8%; average consumption drops by 4.4% with the same price increase. Moderate drinkers respond more to price increases than do heavy drinkers.
The answer is no.
Enter the NZ Government report on excise and minimum pricing. Fortunately, the Minister has more sense than her Ministry and hasn’t gone ahead with minimum pricing; hopefully, she’s not looking at excise. What’s the problem with the report? They started by assuming that heavy drinkers are more responsive to prices than are moderate drinkers.
So why would you assume something that is not backed by the evidence?
And they know it’s wrong. Here, at Table 5, they show the general consensus of the international literature: heavy drinkers don’t respond to prices nearly as strongly as do moderate drinkers. …
Bottom line: heavy drinkers are roughly half as responsive to prices as are moderate drinkers. That’s page 20. And they cite Byrnes accurately at page 21.
So they know their assumptions are wrong, yet they still used them?
But then what do they go and do? They started by trying to get SHORE to estimate NZ elasticities, but something went wrong there: the elasticities were completely out of whack with reality. Reading between the lines at page 25, it looks like SHORE was using the increase in purchases of products on special at supermarkets as part of its price elasticity estimation, and that just ain’t right. If you switch brands because something’s on special and buy more of it than you otherwise would have, that isn’t the same effect as you’d expect for across-the-board price changes you get with excise or minimum pricing.
Way different things. I might buy more Coke rather than Pepsi when Coke is on sale. But that doesn’t mean if the price of both Coke and Pepsi increases that I’ll buy less overall.
The report agrees the NZ figures are wrong:
“It was decided that the significant reductions in consumption estimated using NZ elasticity estimates are not a realistic representation of what is likely to happen in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.”
Yet …
Rather than discard the completely nuts NZ numbers, they let those figures stand and added alternative numbers as robustness checks. Those big headline estimates you’ve been seeing in the papers about just how awesome excise is? They’re based on the numbers that, according to the report, “are not a realistic representation in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.“
Example? A 133% excise hike means about a 40% increase in the cost of low-priced beer, a 44% increase in the cost of low-priced wine, a 45% increase in the cost of low-priced RTDs, and a 103% increase in the price of low-cost spirits. The heavy drinkers SHORE estimated a 61% reduction in harmful consumers’ consumption with that tax hike. So they’re saying that harmful consumers are more than unit elastic. That’s just not right.
I’m glad we have someone who can analyse these reports, and point out the errors in them. we run the risk of flawed decisions being made on the basis of flawed analysis.