Although I am not in any way a socialist, I vigorously oppose anything where the poor and weak are made to subsidise the rich and the powerful. I also strongly oppose policy being enacted which will be to the net detriment of society as a whole. This is why I strongly oppose the latest report from Alcohol Concern “Binge – Drinking to get drunk: Influences on young adult drinking behaviours“. Before anybody gets the wrong idea, I support their concern about binge drinking, especially amongst minors. I also believe that if there were ways to improve this situation, then they should be enacted. However, if economic price incentives are involved, then one should also look at the unintended consequences.

The policy proposed is again a minimum price for alcohol. This has long been touted by the last Labour Government, the BMA and David Cameron. Yet none really understand the harm that it will cause to society. The proposal it to impose a minimum retail price per unit of alcohol of about 40p to 50p. This will not affect the cost in the pubs and clubs, where the cheapest pint of standard lager is around twice this level. It will dramatically impact the retail prices, in both small off-licences and the supermarkets. Below are some examples.

The way prices work is that premium products have not just premium prices, but larger profit margins both in absolute and in percentage terms. A minimum price for alcohol will invert this position. Suddenly a 3 litre bottle of cheap cider will have the highest profit margins not just in absolute, but also in percentage terms. This will create very perverse incentives for the retailer. One direct consequence will cause a rise in the price of drinks already over the minimum price. Consider the situation of the cheapest wine at £2.99 per bottle and the more mainstream wine at £4.99.

Even at 50p a unit, the cheap wine is still cheaper than the mainstream one. If the mainstream wine price remained unchanged, then the price premium to the consumer has dropped by 75%. Better quality has less of a premium. The retailer gets the margins reversed. The margin on the premium product goes from being 86% more to 48% less than the cheaper product. It makes sense for the retailer to increase the price. This increase might not be proportional to the cheap wine, but a least to make a greater margin in value terms.

Will the retailer end up making greater profit. This depends on something called elasticity of demand. To make less money on the cheap wine, demand would have to drop by over 72%. To make less money on the mainstream wine, demand would have to drop more than 53%.

Will this be of benefit to the supermarkets? It depends on the elasticity of demand. From Investopedia

Definition of ‘Price Elasticity Of Demand’

A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:

For the cheap wine the elasticity for break-even 72%/50.5% = 1.43

For the mainstream wine the elasticity for break-even 53%/25% = 2.12

Alcohol is well-known for being highly inelastic with respect to demand. That is elasticity measure is much less than 0.5. The supermarkets and the off-licences will make much, much larger profits on sales of cheap booze. With an elasticity of less than 1, consumers will end up spending more on alcohol than before, even though they are buying a smaller quantity. The biggest proportionate impact will be on those least able to afford that price rise. This is a double-hit. The poor spend a larger proportion of their income on alcohol than those on a higher income. They are also more likely to buy the cheaper forms of booze, which will have the larger percentage price rise.

The more equitable solution is to restructure the excise duties. The tax on alcohol should be shifted not just onto a per unit basis, but in such a way that it specifically targets the low-cost booze which is most attractive to minors. Therefore strong ciders (which I like), alchopops, and strong lagers should all have premium rates that are higher than, say, standard strength beers and wine. Weak taste drinks (Vodka, white cider) should have a premium over strong taste drinks such as real ale, whisky, or full-flavoured cider. This bigger added bonus is that there would a net gain in excise taxes, rather than just a gain in VAT receipts.