A minimum price for alcohol

The current UK government is toying with the idea of introducing a minimum price for alcohol in England and Wales of around 45p per unit. However, just this week it was revealed that some senior cabinet members opposed the policy; putting it in jeopardy.

As with any policy there is a burden of evidence. The impact of such a policy should be established as best as possible. Basic economic arguments and the current evidence about alcohol may or may not lead us to expect that the policy would: i) reduce overall consumption (income effect), ii) increase consumption of other drugs (substitution effect), iii) not affect consumption of alcohol among alcoholics (inelastic demand among addicts), and iv) reduce the welfare of the poorest households (tighter budget constraint).

As was discussed in a previous post, based on arguments presented by David Nutt, the primary policy goal should be a reduction in the harm caused by alcohol; not a reduction in the prevalence of alcohol consumption. Of the above effects, presumably only the first is what the government desires; and, since it is a minimum price increase, only those who purchase the cheapest alcohol would see an income effect. The understanding is that alcoholics are the ones who would thusly be affected. But this leads to point iv); poor households who are not problematic drinkers would see an increase to the price of alcohol, while wealthier households who purchase more expensive alcohol (fine wine is a luxury good, cheap cider an inferior good), wouldn’t be affected. Yet there is certainly evidence (e.g. here and here) to suggest that alcohol consumption among the middle classes is problematic.

A precursory glance at the literature reveals the evidence of the effect of a minimum price of alcohol is fairly limited. It does reveal that, in Canada, it was found that a 10% increase in the minimum price of alcohol led to both a reduction in alcohol consumption and a 31.7% reduction in alcohol-attributable deaths. Epidemiological models set in the UK estimate the same effect.

The purpose of this policy does seem to be prevention of alcohol-related disease. But changing the minimum price of alcohol doesn’t address many of the issues surrounding the causes and effects of alcohol addiction; in particular, the effect of socioeconomic status. Higher socioeconomic status individuals are at least as likely to consume risky amounts of alcohol but appear to be less at risk of the adverse consequences. Indeed, one way of abrogating these effects would be to reduce consumption among the lower status individuals, but this would certainly be inequitable. It is widely accepted that there is a relationship between low socioeconomic status and alcohol addiction due to adverse social factors and poor life circumstances with the arrow of causality pointing in both directions. Perhaps addressing socioeconomic problems could be a more effective solution.

My big fat tax

Some call economics the dismal science, I call it useful. When it comes to obesity one would argue that it offers the mechanisms to prevent a needless tide of early deaths, spiralling NHS costs and sore eyes on the beach. Obesity is an all too obvious condition and frequents the news on a regular basis e.g. http://www.bbc.co.uk/news/health-12566504 last week.

So how can economics inform the obesity epidemic?

At the end of the day weight gain arises as a result of a very basic equation: weight change = calories eaten – calories burned. Taking political motivations aside i.e. pandering to manufacturers, common sense tells us that obesity can be avoided by reducing calories eaten and increasing those burnt. Consuming less calories tends to be easier than burning more and this article shall focus on the first half of the equation accordingly. To lose one pound of fat you need to burn 3500 calories less than you consume, it’s as simple as that. A ‘nudge’ approach as previously discussed is frequently used in public health campaigns, obesity is so off course however that it has got to the point where a nudge is near pointless, one huge push would better suffice.

Using basic economic theory there are two clear ways to make a real impact on this equation and in turn obesity. Basic economic theory tells us that individuals seek to maximise their utility via consumption given a budget constraint. Thinking back to how a change in price of a good affects such an optimisation problem we can see that there are two affects. The first is the income effect, if a good i.e. junk food rises in price then relative income is reduced, the result is a decrease in junk food consumed. The second effect is the substitution effect, individuals will substitute away from junk food to other healthier food items.

So what does this mean for policy from an economics perspective? The two most obvious solutions are inherently interlinked, these are taxation and subsidisation. By taxing junk food you are increasing the relative price of junk food and reducing the relative cost of healthy alternatives. This leads to individuals switching to a reduced junk food diet whilst increasing tax revenues for the government. The tax revenues accrued could then be used to subsidise healthy low calorie alternatives and so increase the cost per calorie of food. This in principle is a simple task, so why doesn’t this happen? In part it does, there is some tax on junk food, however one would argue not nearly enough. Why isn’t there more tax on junk food and subsided healthier food I hear you ask? The answer is decades of weak governments which resort to short term political goals rather than long term and unpopular preventions with the potential to save countless lives. Such a policy would have been incredibly sensible a decade or two ago, now it is a last resort to try stem the tide before it’s too late. If current trends continue expect to see increased pressure on the government resources and spiralling NHS costs. Regardless of what happens now don’t expect to see too many bikinis at the British sea side resorts come 2030 but enjoy a long queue for bariatric surgery. A double pronged attack on obesity via substantial increases in junk food tax and subsidising healthy alternatives wont stop the wave but will certainly help to reduce the damage caused. Lets face it, at the end of the day money talks. Nudging wont lead to decreases in obesity, changes in cold hard cash however may make people think twice when they look at that chocolate bar.