ChainWhat it assumes · how to break it
Start
The government sets a minimum price per unit of alcohol, as Scotland has done since May 2018, so drinks cannot be sold below a floor based on their alcohol content.
1
As a result, the price of cheap, high-strength drinks such as strong cider and own-brand spirits rises to the floor, while drinks already priced above it are unaffected.
minimum price
minimum price
Assumes: The floor is above the current price of the targeted drinks.
But: If the floor is not raised as prices rise with inflation, fewer drinks are affected each year.
2
This means consumers of these drinks pay more per unit of alcohol, so the quantity they demand falls.
PED · contraction in demand
PED · contraction in demand
Best link to attack
Assumes: Demand responds to the higher price.
Assumes: Demand responds to the higher price.
But: Dependent drinkers have very price inelastic demand and may cut spending on food or other essentials instead of drinking less.
3
Consequently, consumers who keep buying lose consumer surplus, and the extra spending goes to retailers and producers rather than to the government as it would with a tax.
consumer surplus
consumer surplus
Assumes: Consumers keep buying the affected drinks.
But: Some switch to drinks just above the floor whose price has not changed, so they lose little.
4
Therefore, heavy drinkers of cheap alcohol bear most of the cost, though they also stand to gain most from better health.
demerit good · regressive effect
demerit good · regressive effect
Assumes: Heavy drinkers buy mainly the cheapest alcohol.
But: Some heavy drinkers buy mid-priced drinks that are already above the floor, so the policy affects them less than intended.
End
Consumers of cheap, strong alcohol pay more, drink less and lose consumer surplus; others are largely unaffected.
Evaluation chain
- E1However, the effect on consumers depends on the price elasticity of demand of those who drink most.
- E2Because dependent drinkers have very price inelastic demand,
- E3so they cut consumption only a little and pay more for the same alcohol, leaving less income for food, heating or rent.
- E4So the policy reduces drinking among moderate buyers of cheap alcohol, but the heaviest drinkers may be made worse off, so the effect on consumers depends on who they are.
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Questions this answers
- Explain, using a diagram, the effect of a minimum price on consumers.
- Assess the impact of minimum unit pricing for alcohol on consumers.
- Discuss whether a minimum price for alcohol is fair to low-income consumers.
Diagram
Minimum price above equilibrium: price rises from Pe to Pmin and quantity demanded falls to Qd, with excess supply. Shade the consumer surplus lost: the rectangle transferred to producers and the deadweight loss triangle.
Reverse and related
Removing the floor → cheap alcohol falls in price and consumption of it rises.