No perfect solution: social costs and the alcohol market

Depending on which side of the debate one is standing, interventions in the alcohol market are either an effective policy instrument to reduce alcohol misuse or an unwarranted intrusion into the free market.  The general justification for intervention on pricing is evidence of market failure; in this case, the sizeable external costs which are ignored in private decision making.  Determining the optimal adjustment can be difficult enough in cases where the external cost links directly to level of consumption; in the case of alcohol the external cost is variable.  For some health harms, risk increases with the amount consumed from the first drink but for other conditions there may be a health gain from moderate alcohol consumption.  Most external costs are associated with excessive drinking.  Therefore the optimal price adjustment would increase with the amount consumed, and at an increasing rate.  Issues of addiction and impaired decision making further cloud the argument.

The analysis of policy options, therefore, becomes an exercise in identifying the second best solution.  This presentation considers the current policy debate surrounding minimum pricing, increased duty and bans on below cost-selling in terms of their likely benefits (reduced external costs) and costs in terms of consumer utility.  It then goes on to consider whether there are alternative methods for aligning private and social decision making.