The UK government laid out proposals today to raise the price of alcohol, or rather, set a minimum price per unit. This minimum price will be 45p. Meanwhile the Scottish parliament is trying to introduce a minimum price of 50p per unit. Will it make any difference?
The responsiveness of demand to changes in price is called 'elasticity' by economists, and there is much debate over how 'elastic' consumers' preferences are. If you respond to a small increase in the price of alcohol by drastically cutting back how much you consume, you are displaying highly elastic preferences for alcohol. If, on the hand, a small price rise wont impact what you consume at all, then you are displaying highly inelastic preferences for alcohol.
The government clearly thinks people's preferences over alcohol are elastic, or there would no point introducing the new minimum price. But the issue has other ramifications. I may consume less cheap supermarket lager but more in the local pub instead. Or I may even buy black market alcohol. In other words, the change in the price of alcohol will impact demand for other goods. Measuring the total impact of a price change gets very complicated very quickly.
How consumers react to the minimum price is crucial. Research by the University of Sheffield suggests people will buy 4.3% less alcohol (see BBC article), a small but not insignificant reduction. The government has decided that on the back of such research the best way to change behaviour is through prices. Only time will tell whether people will respond by drinking less...
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