Would an alcoholic drink less if booze cost more?

25th March, 2009

Even those addicted to alcohol drink less when costs rise, says economist Tim Harford. Because we all respond to prices – even to the point of the day we die or give birth.

If Chief Medical Officer Sir Liam Donaldson has his way, one day we will have to pay at least 50p a unit to buy booze. That’s £1.50 for a large can of strong lager. Most off-licence and supermarket booze costs less than that, so it would certainly change the cost of a drink.
But would it make any difference to hardened drinkers? Many people think not. After all, a tenner would still pay for 20 units – nearly a week’s safe drinking, or some people’s idea of a good night out.
So many people think this would punish ordinary drinkers without deterring the winos, brawlers and wife-beaters. The government won’t touch it. Conservative health spokesman Andrew Lansley says it’s an idea more to do with economics, than medicine.
The odd thing is most economists will think Sir Liam is on to something. Raise the price of drink, we figure, and people will drink less. That’s because people respond to prices in the most unlikely situations.
Margaret Mitchell commented in Gone with the Wind: “Death, taxes and childbirth! There’s never a convenient time for any of them.”
She was wrong: it turns out that death and childbirth can be, and are, rescheduled thanks to tax incentives.
Eonomists Joshua Gans and Andrew Leigh have discovered that after the Australian government announced that it would abolish inheritance tax, effective 1 July 1979, the death rate fell in late June of that year before surging in early July. Gans and Leigh reckon that half the likely taxpayers managed to escape death long enough to escape the tax too.
More cheeringly, when the Australian government announced (with six weeks notice) a “baby bonus” of about £1,250 for families of children born on or after 1 July 2004, something very strange happened in the labour wards. The number of happy events on 1 July was an all-time record, and twice as many births as on 30 June.
Whether entering this world or leaving it, people respond to financial incentives.
Even so, it’s hard to credit that problem drinkers pay much attention to the price of the next drink. Yet they do. Alcoholics respond more to high alcohol prices than moderate drinkers.
One piece of evidence, gathered by economists Philip Cook and George Tauchen, comes from medical records in the United States.
When taxes on alcohol rise, people drink less overall, but liver damage – a symptom of alcohol abuse – falls much more. That has a certain economic logic: the alcoholic consumes more booze than most of us, so responds more to its price.
Other economists have found that binge drinkers, smokers and cannabis users are all very price-sensitive. A recent University of Sheffield study came to much the same conclusion: faced with more expensive drinks, problem drinkers – who tend to be young or drink a lot, and so seek out the cheapest ways to get drunk – would change their behaviour much more than the rest of us.
Yet Sir Liam doesn’t suggest more tax on alcohol – he suggests supermarkets and off-licences put up prices and keep the profits, making it lucrative to flog cheap booze. Unable to compete on price, supermarkets could compete in other ways – for instance, offering freebies (sweets? football stickers?) with every bottle of strong cider. Making cheap booze a supermarket’s most profitable product is likely to backfire, one way or another. After all, supermarkets respond to incentives too.

First published by BBC News Magazine.

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