Why sin taxes don't work

Parliament might create a minimum price for alcohol in the UK. Like 'sin taxes' in any country, this plan has obvious benefits, but hidden costs.

Robert J. Gurecki / The Delaware County Daily Times / AP / File
Bottles of Beaujolais wine line a shelf in Ridley Park, Pa., in this image from Feb., 2003. UK officials want to introduce a minimum selling point for alcohol, to price it out of easy reach and thus reduce its consumption. What are the hidden costs?

According to a commission set up by the Scottish Labour Party, in order to reduce alcohol consumption, a “floor price” for alcohol should be introduced together with a levy on alcohol retailers. Its report also suggests a limit on the number of licences available for retailers and a halt to the sponsorship of sporting events. However, under scrutiny these suggestions may be ineffective.

A minimum price for alcohol aims to raise the price of the “loss leaders”, i.e. drinks that are priced below cost (in order to attract customers), hence the minimum price will be set at/below the market price. Therefore a minimum price will not reduce the actual alcohol consumption, since it will only reduce the excessive demand for alcohol. Moreover, retailers will just switch the “loss leaders” to drinks that cost more than the minimum price, and price these drinks less than their costs while still charging more than the minimum price.

Even if levies and minimum pricing do manage to raise the price of alcohol, they will hit sensible drinkers as well as binge drinkers. Although binge drinkers are more sensitive to price changes, it will be the sensible, drinkers who will have to reduce their consumption. For binge drinkers, alcohol is an every-day necessity with few or no substitute, a Giffen good, to put it in economic jargon. A rise in the price of alcohol will mean that alcoholics will have to reduce the consumption of other goods in order to maintain their budget for alcohol, and as a result their alcohol consumption will not decrease. In contrast, alcohol is a normal good for sensible drinkers, and a rise in the price of alcoholic drinks will reduce their ability to purchase. Hence levies and minimum pricing would not be an effective or fair solution.

Limiting the number of licences will reduce the availability of alcoholic drinks, making them more expensive and harder to buy. Again this will hit sensible drinkers the hardest, for the reasons stated above. It may well encourage black markets to grow, increasing the cost of policing without reducing alcohol consumption.

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