Is alcohol too cheap?
Cheshire Police Chief Constable Peter Fahy hit quite a few headlines last week remarking that "Alcohol is too cheap, too readily available and too strong. Young people cannot handle it". Age decrying youth is nothing new and in the middle of August these kind of stories tend to get more mileage than they would otherwise. Still, he has a point. Price and age restrictions are doing little to restrict the supply of alcohol to those under 18 who are determined to get hold of it. And many of those of us old enough to purchase as much as we like drink too much.
So how should a society tackle problems caused by alcohol? "Negative externalities" (such as long-term health effects of alcohol consumption or environmental pollution) can be ameliorated by, say, banning alcohol or imposing quotas on pollution-producing activities. However economists generally prefer Pigouvian taxes. These impose a cost on the producer of the externality in order to discourage their behaviour and (at least in theory) the revenue raised can be used to compensate those who suffer. They also avoid the criminality and avoidance issues created by bans and quotas - think of Prohibition in the US. So a properly-levied tax on alcohol could both discourage consumption and be used to pay for the healthcare of those who over-consume.
Fahy suggests that drink is too cheap, so is raising the price of alcohol the answer? In fact it's already quite highly taxed compared to other food and drink. All alcohol sold in the UK faces VAT at 17.5%. Excise duty is also levied and is more tightly targeted to discourage consumption It's payable on the volume of alcohol rather than the value of the product. Rates of excise duty also reflects conventional beliefs about what problem drinkers drink. Excise duty on cider is almost double that on beer, so for a 5%-strength pint 75p is payable on the cider and only 39p on the beer. High prices isn't the only way governments round the world try to restrict problem drinking, there's high age limits (United States), a moratorium on the issuing of licences (Ireland) and a government monopoly on off-sales (Norway).
But Pigouvian taxes are most efficient when levied on activities which produce identical externalities whoever engages in them. A tonne of carbon produces the same effect whoever emits it and there's a broadly linear relationship between every extra cigarette smoked and the effect on your future health. So is the current excise duty regime the best way to deter problem drinking? Probably not. The marginal impact of that extra pint varies hugely if consumed by a moderate or a heavy drinker. Also, tastes are heterogeneous and the price elasticity of demand varies hugely across consumers. Problem drinkers are the ones least sensitive to changes in price. Moderate drinkers (who value alcohol consumption far less) are much more likely to reduce their consumption in response to upward price movements. So a well-intentioned tax hike targets precisely the wrong people.
Taxes on betting display the same problem. It's clear that problem gambling has an effect on individuals and particularly their families, hence winnings are taxed to discourage it. But unlike carbon emission the negative externality varies hugely from gambler to gambler. Is it either equitable or efficient that the occasional gambler or drinker faces the same tax rate as the full-blown addict?
Is there a better system out there? Probably. I propose a kind of tax-free allowance for drinkers so that everyone can purchase a reasonable amount of alcohol free of excise duty per month (say up to the recommended limit). After you've drunk your allowance you pay a price for alcohol at a pretty punitive rate. In practise this could be done with some kind of PIN-based card issued to all adults who apply for one. Once you've purchased your allowance you simply buy as much alcohol as you like at the higher price level, without the card. Unlike the current system this pricing regime would recognise that the marginal impact of alcohol varies hugely as consumption increases. Heavy drinkers and alcoholics pay the price for their activity while the rest of us aren't taxed for their sins.
Would this system be free of abuse? Not completely, but less than you would think. No one wants to be perceived as a heavy drinker and people would be reluctant to ask their friends to make trips to the bar to make use of their unused allowance. Anyway, friends would probably want to keep their allowance for themselves in case they need it. The system would also prevent the problem mentioned by Fahy of adults purchasing drink for under-18s. Smuggling is unlikely to be an issue either. Alcohol is heavy and bulky and contraband is already tiny compared to that other Pigouvian-taxed product, cigarettes. However the cost of installing and maintaining this kind of allowance-based system in pubs and shops would be large and would be greeted by predictable squeals from retailers and pub-owners. Yet there is a growing recognition that alcohol-related problems are a serious societal problem and neither the current pricing or sales regime is doing much to solve it.
