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 the cheapest, strongest alcohol rises, which is the alcohol most linked to harmful drinking.
minimum price · demerit good
minimum price · demerit good
Assumes: Harmful drinkers buy the cheapest alcohol.
But: If harmful drinkers buy across all price ranges, the floor misses much of the problem.
2
This means consumption of these drinks falls, moving output from the free-market level towards the social optimum where MSB equals MSC.
social optimum
social optimum
Best link to attack
Assumes: Demand responds enough to the higher price.
Assumes: Demand responds enough to the higher price.
But: Demand from dependent drinkers is very price inelastic, so their consumption falls little.
3
Consequently, external costs such as NHS treatment, crime and lost working days fall, and drinkers who underestimate the harm to themselves drink less.
negative externality · information failure
negative externality · information failure
Assumes: The fall in drinking comes from those causing the harm.
But: If moderate drinkers cut back most, the external costs fall less than consumption.
4
Therefore, the welfare loss from overconsumption shrinks, with the policy aimed more closely at cheap, harmful drinking than a tax on all alcohol.
welfare loss
welfare loss
Assumes: The floor is set at the right level.
But: If the floor is not raised with inflation, its effect wears away over time.
End
Consumption of cheap, strong alcohol falls towards the social optimum and the welfare loss shrinks.
Evaluation chain
- E1However, how far output moves towards the social optimum depends on how price elastic the demand of heavy drinkers is.
- E2Because the people causing most external cost are often dependent drinkers with very inelastic demand,
- E3so the floor cuts drinking more among moderate buyers of cheap alcohol than among those causing most harm.
- E4So the minimum price reduces the welfare loss, but by less than the price rise suggests, and it works best alongside treatment and support for dependent drinkers.
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Questions this answers
- Explain, using a diagram, how a minimum price can reduce overconsumption of a demerit good.
- Assess the effectiveness of minimum unit pricing in reducing the harm caused by alcohol.
- Evaluate whether a minimum price is better than an indirect tax for correcting market failure.
Diagram
Demand (MPB) with MSB below it because of external costs of consumption. The free market gives Qe; the social optimum is Q*. A minimum price above Pe cuts quantity demanded towards Q*; set at the price on MPB above Q*, the welfare loss triangle disappears.
Reverse and related
Removing the floor → cheap alcohol consumption rises above the social optimum again and the welfare loss returns.