Minimum pricing, also referred to as a ‘price floor’, is a form of government intervention where the price of a good, is set above the equilibrium price, determined where supply and demand intersects and is where goods are not allowed to be sold at a price ‘below this level’ (Sloman et al. 2018:80). This essay will focus on the effects of minimum pricing on alcohol in Scotland on consumers, producers and the government and whether this intervention is considered favourably for each of them or not. This will be done through focusing an analysis on the price elasticity of demand, income inequality, economic welfare as well as if an alternative government policy of taxation could be used as an alternative intervention and achieve the same objective of reducing alcohol consumption.
In a market, without any intervention from the government, the price of a good, in this case alcohol is determined through the interaction of supply and demand, where they both meet. This can be seen on the following diagram (diagram 1), where the supply and demand of alcohol is represented by S1 and D1, representing an equilibrium quantity of Q* and price of P*. However, as a result of minimum pricing being implemented, where in the context of the minimum pricing of alcohol in Scotland this currently being 50p per unit, (The Economist 2018) it increases the price to P2. This results in the quantity supplied at this price to increase to Q2 and quantity demanded to fall to Q3, suggesting there is excess supply in the market for alcohol represented by the arrow as supply becomes greater than demand.
From a higher price of P2, it would suggest that this would first of all have a negative effect on consumers who purchase alcohol as the price has increased. According to the law of demand an increase in the price leads to the quantity demanded of a good to fall, which is illustrated in diagram 1 where the quantity falls from Q* to Q3.
Despite this assumption from the above model, the quantity demanded of alcohol may not actually contract as a result of the price elasticity of demand for alcohol being inelastic. This implies that a change in the price of alcohol will result in a situation where ‘quantity demanded changes by a smaller percentage’ (Sloman et al 2018:57). This can be seen present in the UK where the HMRC estimated that wine had an elasticity of -0.08 (Sousa 2014). In this case, the quantity of alcohol consumed may not actually reduce, suggesting how minimum pricing may not be the most appropriate intervention if the government is trying to reduce alcohol consumption.
From an increased price for alcohol, and with the assumption from diagram 1 that the quantity demanded falls, it could be considered beneficial for consumers health. This is because a higher price may discourage the consumption of alcohol. Research has suggested how alcohol is related to a number of cancers, liver disease and brain damage (NHS 2016). This research could imply that if alcohol consumption fell, then the number of alcohol related illness in consumers would also fall, which is beneficial for both consumers and the government as discussed below.
Furthermore, minimum pricing on alcohol could be suggested to influence consumers in a further negative way in terms of a regressive effect. A study conducted in Australia found a minimum price on alcohol would result in a situation, ‘where spending increases represent 2.7% of income of the lower-income quintile, compared with 0.3% of income in the highest-income quintile’ (Vandenberg, Sharma 2015) assuming that consumers bought the same quantity of alcohol. These findings clearly show how the lower incomer's would spend a larger proportion of their income in comparison to the higher incomer's. In this case, it could suggest how the minimum pricing in Scotland may result in a similar outcome which could lead to an increase in the inequality between the population, potentially having a negative effect on the living standards of the lower incomer's.
However, the contrasting view to the above is argued in a document proposed by the Scottish Government in 2012 that suggests that lower incomer's may not actually be as affected due to ‘the virtue of the fact they drink very little’ (Sturgeon 2012). This could therefore imply that the view on whether minimum pricing would have a regressive effect on consumers in Scotland is subjective and would need evidence conducted in Scotland to support this view.
Considering minimum pricing on alcohol from the perspective of producers could be considered as beneficial. Diagram 1 shows as a result of the price floor, it increases the price of alcohol from the equilibrium of P1 to P2 and increases quantity supplied to Q3 as there is a greater incentive to increase supply from the new higher price. This would suggest that for producers or firms such as supermarkets selling alcohol it is advantageous for them as from this higher price, their revenue from sales should increase, especially if the demand is price inelastic.
However, contradictory evidence from a report proposed that if in 2012, the minimum pricing on alcohol was to take place, then they estimated that it ‘could cost the Scotch Whisky industry £500 million in exports’ (Gillian 2012). In this case it may be implied that some producers may be affected in a negative way as it may result in a reduction in their exported sales and lead to the question of the competitiveness of Scottish alcohol producers in global markets from higher prices.
When analysing the effects of minimum pricing in terms of economic welfare, it may be appropriate to suggest that producers benefit greater than consumers. The following diagrams show the effects of minimum pricing in terms of what is referred to as consumer surplus and producer surplus.
Diagram 2a initially represents the equilibrium price and quantity (P* and Q*), where at this point the diagram assumes an equal amount of consumer (green) and producer (yellow) surplus. However, when minimum pricing is implemented, represented by a new price of 50p, diagram 2b shows that the consumer surplus area (green) has reduced, but that the producer area (yellow) has increased. Diagram 2b also represents how there is a dead weight loss to society (DWL) represented by the pink area. This suggests how despite theoretically producers are benefitting more than consumers as producer surplus increases, from the perspective of economic welfare, it leaves the market for alcohol operating in an inefficient way since it would now not be operating in equilibrium.
Looking from the perspective of demand falling for alcohol as diagram 1 suggests, for the government this could be suggested beneficial. According to a report from the Office for National Statistics (ONS) the UK faced ‘7,327 deaths' (Bennet, 2017) related to alcohol consumption. This statistic clearly suggests that alcohol consumption has financial constraints on the government, where further research has found it costs ‘the NHS around £3.5 billion annually’ (Health and Social Care Information Centre 2016). Referring back to figure 1, if the quantity demanded of alcohol did fall, it could be favourable for the government as it could result in alcohol consumption to fall, and therefore reduce the number of alcohol-related hospital admissions. However, if the demand for alcohol is inelastic as already suggested, then alcohol consumption may not fall by a quantity that would benefit the government in this way.
When comparing the advantages of minimum alcohol pricing for the government and producers, it could be suggested that producers have a greater benefit. This is because research has proposed how the drinks industry would benefit by an estimation of ‘840 million’ (Griffith 2015). In this case, it could imply that producers have a greater benefit in terms of revenue than the government.
From the viewpoint above, minimum pricing is criticised from the governments perspective as it raises the revenue of the drinks industry rather than the government. This has led to the argument of using an alternative policy such as taxation. This is where the taxes levied on alcohol increase, increasing the prices of alcohol sold in Scotland as well as also increasing ‘tax revenues by £980 million’ (Griffith 2015
As seen on the same article post as above, the above view is seen to be contradicted with the statement that ‘taxes are not always passed onto consumers’ (Ludbrook 2015). This suggests that producers may actually pay the tax themselves to keep consumer prices stable and maintain their competitiveness. This may therefore imply minimum pricing may be a more effective way in comparison to taxation in ensuring that the prices of alcohol do increase to reduce alcohol consumption if this is the main objective.
In conclusion, the main effect of minimum pricing on alcohol is that it increases its price above the equilibrium price. Using the concept of the law of demand, this minimum pricing on alcohol would increase the price for consumers and thus lead to a fall in demand which is favourably for consumers health, but as analysed, does depend upon the price elasticity of demand. Through increased prices, a potential increase in inequality and with a reduction in consumer surplus it may be valid to conclude that consumers benefit least from such a policy. In relation to producers, not only does their producer surplus theoretically increase, research has suggested how the drinks industry would benefit by an estimation of ‘840 million’ (Griffith 2015) suggesting that in relation to revenue, producers should benefit favourably and could see greater benefits than the government. The way the government is likely to benefit most is through the reduction in alcohol related admissions into hospitals which would come from the reduced consumption of alcohol as long as consumers showed their responsiveness to such price increases so that demand is price inelastic. The results above would be the result of using minimum pricing alone or alongside another policy such as the taxation which would also provide the government with tax revenue.