What shall we do with the drunken nation?

Over the last week I’ve noticed quite a few alcohol-related articles on tutor2u (here and here). To extend the tradition, here’s my take on the subject:

It’s becoming quite clear that alcohol abuse is fast becoming a problem for Britain. Every day we see tabloids headlines screaming “A Nation of Alcoholics”, etc. Okay, perhaps the issue isn’t that bad but we definitely have to do something to curb this binge drinking “epidemic”. Being the pragmatist that I am, I’d like to examine a spectrum of policies the government have at their disposal and their likely consequences.

First of all there is the knee-jerk reflex, first port of call for all governments: taxation. If we agree with the assumption that alcohol is a de-merit good with negative externalities attached to it, then a Pigovian tax is rightly justified. By textbook theory, it should decrease the level of alcohol consumption by pricing it above easy reach. This is an attractive option for the government since it earns them further tax revenue and hit youngsters the hardest since their PEDs for alcohol is likely to be relatively more elastic.

However, under further scrutiny we discover that perhaps taxing alcohol further would not be the miracle cure we need. We already have one of the highest alcohol taxes in Europe, with more than 27p per pint of beer and £1.44 from the average bottle of wine going into the Treasury’s coffers. There is already a fairly active market in European-imported alcohol to avoid the punitive British taxes (and even more so in cigarettes), if we act alone then all it would be contributing to is a more rampant underground market in EU smugglers responding to the higher profitability of doing so. And may I remind you the utter failure of US prohibition in the 20s, when the mafia ended up controlling the black market and people went blind drinking excessively strong moonshine. It’s evident that you can’t simply turn off the tap by restricting supply when there is such a crazed frenzy (possibly dependence) in demand.

Another weapon in the government arsenal, and one that is being increasingly talked about, is forcing supermarkets and off-licences to raise their prices on alcohol, once again with the intention of pricing it out of reach for underage drinkers. But this seems to be a strange proposition for me since it’s not an improvement from simple taxation and suffers from the same (plus more) pitfalls. Once again it would be a simple diversion away from the domestic market, except this time we would also have to introduce new legislation on collusion. Suppliers collectively raising prices is the very definition of a cartel, whether government-willed or not. And you can bet on your £4 WKD Blues that the smaller suppliers will be itching to cut their prices to steal a greater market share. This is why the larger suppliers are so adamantly against it. And regulation to make sure suppliers don’t undercut each other (wow, there’s a novel idea – regulators acting in the interest of the suppliers!) would be cumbersome and bureaucratic.

One idea I’ve been batting around to cut off the supply of cheap alcohol flooding in from Europe is taxing imported alcohol (essentially, a tariff. My free-marketeering alter ego is turning in his grave). However, it does run into snags such as being illegal under EU legislation, inefficient and an outright deprivation of civil liberties. Yeah. But I do think that if a price-related policy is to be introduced then the European market will have to be closely looked and any loopholes closed off.

The most puzzling thing when looking at Europe is that despite having lower taxes on alcohol they still manage to balance that with a lower rate of alcohol abuse. This suggests something fundamentally damaged in Britain’s social structure, which would require repairing beyond a simple pricing policy. Economics teaches us about relationships and interactions: all the sectors including education, healthcare and welfare are all interlinked – alcohol abuse is only one symptom of a festering disease culminating in Britain.

Finally, I’m surprised this hasn’t been given a lot of thought but are pricing policies not unfair to the people who do drink responsibly? If the responsible drinkers suffer from higher prices as a result of the irresponsible ones, there is an externality incurred there too. But unlike other markets with asymmetrical information such as second-hand car dealers, we can’t so easily distinguish between the peaches and the lemons.

[The concluding half of this two-parter can be found here.]