Economy,  UK Politics

Coalition should binge on Economics

Proposals to modify the behaviour of alcohol abusers by setting a minimum price for alcohol is a stupid notion set in motion by stupid people who make stupid policy decisions based on their stupid ideas.

Anyone who has done even a year of economics at school or university knows about ‘price elasticity of demand’. Any politician or policy maker who doesn’t – and who might be tempted to waste pubic funds setting up an inquiry into this concept – can consult Wikipedia (note, not Wikileaks .. it really isn’t a secret) for free.

Here’s the gist of it:

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income).

For the layperson, allow me to offer a crude translation: Certain products – the classic example being alcohol – do not respond in the typical way to price changes in the market. A price increase does not lead to a significant drop in demand. People simply grin and bear the price increase.

But, as in physics, there is always an effect. There has to be one. Unfortunately it is not the effect the stupid policy makers hoped for. The effect of the increase in cost is transferred to more ‘elastic’ goods. Frequently these are the goods that are good for us.

Now, this is a mile away from what the government and anti-alcohol campaigners want to achieve. They think that by raising the price of booze, demand will drop. The government will raise the price, but of course the campaigners don’t think it is by enough. The BBC has a nice summary of their silly debate.

These nannyist campaigners say the planned price increase will have “zero impact”. They’re right, of course. But for the wrong reasons. It will have “zero effect” because people are more likely to buy less baby formula and default on their electricity bill than to buy fewer crates of lager. The most desperate will turn to crime.

Worse, far from reducing alchol-related social ills, arguably, it may even have the opposite effect. It will make social drinking at pubs even more expensive relative to wholesale drinking. People will end up drinking more at home, quaffing back the artificially inflated (but still cheaper) supermarket booze in the environment most likely to encourage them to destroy their livers, beat up their spouses and neglect their children, and to cause accidents at work even more than before.

Governments can add massive taxes to ‘inelastic’ goods – like alcohol, like petrol – to (shamelessly) raise revenues. They may even call these “sin taxes”. But they should disabuse themselves of the idea that it affects consumer behaviour in any way.

We cannot be taxed into good behaviour or healthy living.