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
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
Since demand for alcohol is price inelastic, the rise in price outweighs the fall in quantity, so retailers' revenue from these drinks rises.
PED · total revenue
PED · total revenue
Best link to attack
Assumes: Demand for alcohol from these retailers is price inelastic.
Assumes: Demand for alcohol from these retailers is price inelastic.
But: Shoppers near a border can buy where no floor applies, so demand from local retailers is more elastic and their sales fall further.
4
Therefore, unlike an indirect tax, the minimum price transfers money from consumers to retailers and producers, raising producer surplus and profit on these drinks.
producer surplus · windfall gain
producer surplus · windfall gain
Assumes: Costs are unchanged.
But: Makers of the cheapest strong drinks may lose if their sales fall heavily, even though the price rises.
End
Retailers and producers receive a higher price, and their revenue and producer surplus rise if demand is inelastic.
Evaluation chain
- E1However, the gain to producers depends on demand being price inelastic.
- E2If drinkers can easily buy alcohol where no floor applies, such as across a border,
- E3then demand from local retailers is more elastic and their sales fall by more.
- E4So retailers and producers gain most where consumers cannot avoid the floor; near a border the gain is smaller and some may lose.
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Questions this answers
- Explain the effect of a minimum price on producer surplus.
- Assess the impact of minimum unit pricing on alcohol retailers.
- Compare the effects on producers of a minimum price and an indirect tax.
Diagram
Minimum price above equilibrium. Producer surplus gains the rectangle between Pmin and Pe up to Qd and loses the triangle on units no longer sold. Show excess supply Qs minus Qd.
Reverse and related
Removing the floor → prices fall, sales rise and the windfall to retailers disappears.