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How does the price of alcohol affect consumption?

The relationship between the price and consumption of a good is measured by its price elasticity. This is often expressed as the percentage change in consumption of the good that results from a 1% increase in its price, all else equal. Goods with a price elasticity greater than 1% are described as ‘relatively elastic’, while those with a price elasticity of less than 1% are described as ‘relatively inelastic’. The economic ‘law of demand’ states that people consume less of a good when its price increases, though there are a few unusual exceptions.

A number of academic studies have attempted to estimate the price elasticity of demand for alcohol. While these have produced a range of estimates, the majority agree that alcohol conforms to the law of demand, but that it is relatively inelastic. In other words, raising alcohol prices reduces alcohol consumption, but typically the fall in consumption is proportionately smaller than the increase in prices.

Two major meta-analyses have attempted to consolidate and summarise this research. Wagenaar et al reviewed 112 studies of the impact of changes in alcohol taxes or prices on consumption, and found on average a 1% increase in price leads to a:

  • 0.46% decrease in beer consumption
  • 0.69% decrease in wine consumption
  • 0.80% decrease in spirits consumption[1]

They also found that heavy drinkers are less responsive to price, with a 1% increase in price reducing drinking in the group by 0.28%.

In a similar analysis, Gallet also found that demand for wine and spirits is more elastic than demand for beer.[2] However, his estimates were slightly lower than Wagenaar et al - in his analysis, a 1% increase in prices causes a:

  • 0.36% decrease in beer consumption
  • 0.70% decrease in wine consumption
  • 0.68% decrease in spirits consumption
  • 0.50% decrease in overall alcohol consumption

Gallet also looked at the relationship between age and price sensitivity, and found that younger individuals reduce their drinking less in response to a change in prices. However, he suggests that this might be because younger people are more likely to drink beer, which is less price elastic.

Supporting the arguments for the use of affordability metrics (see above), Gallet also shows that increases in income are associated with higher levels of drinking. On average, he finds that a 1% increase in income is associated with a:

  • 0.39% increase in beer consumption
  • 1.10% increase in wine consumption
  • 1.00% increase in spirits consumption
  • 0.50% increase in overall alcohol consumption

Both of these studies aggregate data from a range of different countries, with different cultures and economies, so we should be careful in applying them to any specific context. The UK Government produces its own estimates of price sensitivity to model the effect of tax changes.[3] These split out the effect of changes in price on both on-trade and off-trade sales, and find that beer and cider consumption is more price elastic in the off-trade, but wine and spirits consumption is more elastic in the on-trade. In line with other studies, it reports that demand for spirits is more elastic than other drinks, though unusually the elasticity of wine is relatively low. The Government also estimates ‘cross-price elasticities’: the impact of a change in the price of one product on the consumption of another. These elasticity estimates are shown in figure 7 below.

 


 

However, using an alternative modelling approach, Meng et al produce somewhat higher elasticities, except for spirits, which are considerably lower (figure 8).[4]

 


 

Bringing these studies together, we find a general consensus that raising the price of alcohol does reduce consumption, typically by about half as much as the price increase (so a 1% price rise reduces drinking by around 0.5%).[5] There is also agreement that demand is more elastic in the off-trade for beer and cider, and in the on-trade for wine and spirits. However, there remains disagreement over which particular drinks are most price elastic.

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[1] Wagenaar A C et al (2009)., ‘Effects of beverage alcohol price and tax levels on drinking: a meta-analysis of 1,003 estimates from 112 studies’, Addiction 104:2, pp. 179–90

[2] Gallet C A (2007)., ‘The demand for alcohol: a meta-analysis of elasticities’, The Australasian Journal of Agricultural and Resource Economics 51:2, pp. 121–35. See also Fogarty J (2010)., ‘The demand for beer, wine and spirits: a survey of the literature’, Journal of Economic Surveys 24:3, pp. 428–78

[3] Sousa J (2014)., ‘Estimation of price elasticities of demand for alcohol in the United Kingdom’, HMRC Working Paper 16

[4] Meng Y et al (2014)., ‘Estimation of own and cross price elasticities of alcohol demand in the UK – a pseudo-panel approach using the Living Costs and Food Survey 2001–2009’, Journal of Health Economics 34, pp. 96–103

[5] Public Health England (2016), ‘The Public Health Burden of Alcohol and the Effectiveness and Cost-Effectiveness of Alcohol Control Policies: An evidence review’, p. 83