Petrol tax:speeding :: alcohol tax:binge drinking

If you want to reduce binge drinking, excise tax rates are a remarkably blunt instrument. We don't use petrol taxes to curb drag racing; we shouldn't think that alcohol excise is a great solution to binge drinking.

I'd posted last year on a nice Australian study by Byrnes et al who found that tax increases did a lot to curb light and moderate drinkers' consumption, but did little to stop binge drinkers. Heavy drinkers did respond to the price hikes, but only by cutting back on their light drinking days. They still binged on the weekends.

Was that study representative? A new metastudy by Jon Nelson says so. Jon went through 56 papers examining the effects of alcohol taxes or prices on binge drinking and found very little effect. He writes:

A large body of evidence now indicates that binge drinkers are not highly-responsive to increased prices or taxes, and may not respond at all. Nonresponsiveness holds generally for younger and older drinkers and for male and female binge drinkers alike. Increased alcohol prices or taxes are unlikely to be effective as a means to reduce binge drinking, regardless of gender or age group.

Nelson notes that a lot of alcohol policy papers suggest prices as effective mechanism against binge drinking. Livingston's review, quoted by Nelson, looks a lot like the Law Commission's review of the effect of prices on heavy drinkers from a couple of years ago. Nelson on Livingston:

A recent review by Livingston (2013, p. 374) argues that “many critics of alcohol taxation suggest that it fails to affect problematic drinkers [but] this is not supported by the literature, with studies showing that both young people and heavy drinkers respond to price changes.” A Global Strategy report of the World Health Organization (2010, p. 16) states that “. . . increasing the price of alcoholic beverages is one of the most effective interventions to reduce harmful use of alcohol.” These and similar statements tend to be based on limited literature reviews or econometric studies that focus on population-level demand, and not alcohol demands by individual binge drinkers and other heavy/excessive drinkers.

 And me on LC:

The LC cites a WHO study arguing that heavy drinkers are no less elastic than other drinkers. A quick check shows the WHO is looking at 2-3 studies while the above-linked one [me citing Wagenaar] is a meta-study of more than a hundred, with results that are near identical to another meta-study of similar magnitude. The latter, forthcoming in the Journal of Economic Surveys, doesn't give a breakdown between heavy and light drinkers, but has near identical estimates of average elasticity. I give a heck of a lot more weight to a serious meta-study, and especially when two of them give near-identical results, then to a couple of pieces picked from the potential list. If there are more than a hundred studies, you can always find a few that give you numbers you like.

Looking more closely at the Law Commission's preferred WHO finding, ... wow. Terrible work.

While heavy drinkers are sometimes thought to be likely to be less affected by price, the Committee found that the evidence does not support this belief, with higher prices affecting the amounts consumed by frequent and heavy drinkers. This finding is supported by a large body of evidence which has shown an impact of prices on harms caused by alcohol, also indicating therefore that heavier drinking has been reduced (34). Natural experiments that have occurred recently in Europe as part of changes required as consequences of economic treaties have shown that as alcohol taxes and prices have been lowered, so sales and alcohol consumption have increased (37). In some jurisdictions in Europe, special taxes have been introduced for spirit-based sweet premixed drinks, in response to increases in young people’s drinking (38). These have led to reductions in sales and consumption of the specific drinks.

Nothing in the paragraph supports the WHO's argument. Nothing. Demand curves slope downwards, that's all they're saying. All groups are somewhat elastic in that demand drops when price increases. The question at hand is whether moderate drinkers reduce their consumption by more than do heavy drinkers, and they provide zero evidence supporting their opening claim. I cannot see how the Law Commission dismissed the findings of the meta-study based on this paragraph.

Why does this matter? There are a whole pile of price-based regulations that get recommended because of potential effects on binge drinking: alcohol minimum pricing, alcohol excise, banning price discounting at bars (happy hours), for example. Nelson finds they don't really do much, whether for youths, young adults, or adults. Some fun results from field experiments:

The natural experiments examine tax reductions on beer and wine (Hong Kong), spirits (Sweden, 14 Switzerland), and all beverages (Finland). Tax cuts range from 100% in Hong Kong to about 30-50% in Nordic countries. A study for Finland by Helakorpi and colleagues (2010) finds mixed effects on binge drinking, while four other studies report null effects on binge drinking and heavy drinking more generally. In some cases, empirical results appear to be dominated by existing trends toward less binge drinking, which are not offset by tax cuts and reductions in alcohol prices.

There are four field studies for the United States, one for Australia, and one for the United Kingdom. Varied price measures are examined: free alcohol at events (2 studies); price discounting such as pitcher specials, drinking game discounts, and buying rounds (3); fixed fee/ cover charges for all-you-can drink (one study); and average price comparisons by drinking level (one study). A study by Clapp and colleagues (2003) reports null results for free alcohol, but Wagoner and colleagues (2012) find that free drinks increase binge drinking by both genders.

Thombs and colleagues (2009) report that fixed-fees increase chances of intoxication among college students, but other price promotions are not significant. Stockwell and colleagues (1993) reports null results for price discounting among young adults in Australia, while Jamison and Myers (2008) and O’Mara et al. (2009) report mixed results for binge drinking and intoxication. Overall, this is a mixed set of results. Four United States studies use college student respondents, so results can be compared to seven studies using Harvard CAS data. Three CAS studies report that fixed fees increase binge participation (Powell et al., 2002; Wechsler et al., 2000; Weitzman et al., 2003), but three studies also report null results for fixed fees or free drinks (Williams et al.,2005; Wolaver, 2007; Wolaver et al., 2007a).

A few further points:

• The cutoff for binge drinking in the NZ data is 5 standard drinks for youths and 7 for adults. Seven standard drinks is more than I would have in a typical session. But a half litre of Renaissance Scotch Ale, at 7%, is 2.8 standard drinks. Say you get to the Staff Club at 4:30 on a cool winter's day and have a pint. Then you have another at 6. Then you have a half-pint at 7:30. You've just had a binge drinking session, and you've very likely not gotten drunk. Sure, it's more than you should have on average every night, but you don't go to the Staff Club every night, do you? Binge drinking encompasses a range of drinking patterns both harmful and (relatively) harmless.
• There's been a fair bit of recent media talk around the burden of drunks in the emergency department. I'd love to know how much of that could be reduced by having a separate facility, staffed by a paramedic and a cop, where drunks with minor injuries, or who are too intoxicated to drop anywhere else, could be kept until they're sober enough to release. Put a fee for service on the facility so it recoups its costs. It's no surprise that emergency room doctors get fed up with obnoxious drunks who get dumped there. Question is why we're leaving so many there for so long rather than moving them on to far less costly holding facilities. 

Sometimes, prices are blunt

Where the social harms from alcohol consumption are nonlinear and excise is constrained to be linear, any excise tax will wind up being a pretty blunt way of trying to internalise harms. An excise tax that raises revenue sufficient to cover the total social cost imposed will necessarily overtax light and moderate drinkers while undertaxing those imposing larger social harms, if we expect that it's the heavy drinkers who impose large social costs on others rather than just large health costs on themselves.

Reasonable policy tries instead to focus on the relevant margins. An alcohol excise tax sufficient to internalise the external harms imposed by heavy drinkers will impose very strong penalty on moderate drinkers. Instead, policy should combine a rather lower excise component with penalties attached directly to the actions that impose external harms: penalties for being drunk and disorderly; penalties for driving while intoxicated; making alcohol use an aggravating factor in sentencing for other crimes.

A new bit of evidence that prices are a blunt instrument in dealing with harms imposed by heavy drinkers. I've typically cited Wagenaar's metastudy showing that heavy drinkers are roughly 60% as price responsive as moderate drinkers: a 10% price increase has drinkers in total reduce consumption by 4.4% but has heavy drinkers reduce consumption only by 2.8%. The University of Maryland's Jon Nelson has a new study out focusing on a smaller proportion of the population of estimates, but the ones with the finer-grained individual data that allows for demographic breakdowns. The abstract summarises things:

Gender differences in drinking patterns are potentially important for public policies, especially policies that rely extensively on higher alcohol taxes and prices. This paper presents a systematic review of alcohol prices and gender differences in drinking and heavy drinking by adults and young adults. Starting with a database of 578 studies of alcohol demand and other outcomes, 15 studies are reviewed of adult drinking including discussion of samples, measurement issues, econometric models, special variables, and key empirical results. A similar discussion is presented for eight studies of drinking by young adults, ages 18–26 years. Four conclusions are obtained from the review. First, adult men have less elastic demands compared with women. Second, there is little or no price response by heavy-drinking adults, regardless of gender. Third, although the sample is small, price might be important for drinking participation by young adults. Fourth, the results strongly suggest that heavy drinking by young adults, regardless of gender, is not easily dissuaded by higher prices. Policy implications, primary study limitations, and suggestions for future research are discussed.

Nelson here provides more of a literature review than a metastudy that would provide a new summary elasticity measure. A couple other interesting findings:

• Bans on alcohol on university campuses do rather more to deter moderate drinking than to stop heavy drinking;
• The number of licenced outlets near campus has little effect on drinking or on heavy drinking among young adults.

Inelastic demand

Gorbachev's crackdown on alcoholism reduced heavy drinking in the former Soviet Union. He combined some measures directly targeting heavy drinkers with price increases and supply reductions. Bhattacharya and coauthors wrote:

The results suggest little evidence that our summary measure of campaign intensity operates either through differential supply shifts or through differential price increases. However, we are hesitant to draw conclusions given the limitations of the state vodka production and alcohol price index data noted earlier. We emphasize that this is an important area for further research.

I wasn't surprised that Bhattacharya wasn't able to find price effects on heavy drinking; I expected that the Soviet campaign's effectiveness came rather from bans on workplace drunkenness and mandatory treatment for alcoholism. Why? It's hard to target heavy drinkers with price measures.

I've previously cited Wagenaar's metastudy showing that heavy drinkers are only about 60% as responsive to prices as are moderate drinkers. Jon Nelson adds to this literature looking in particular at the differential price responsiveness of heavy and moderate drinkers. He concludes that Wagenaar was too optimistic about the degree to which heavy drinkers respond to price measures. After an extensive literature review, Nelson concludes:

The review found only two of nineteen empirical studies where there was a significant and substantial price/tax response by heavy-drinking adults (ages > 26 years), and even these two studies present mixed results. On the other hand, many studies show that moderate-drinking adults have significant and substantial price/tax elasticities, including both studies for Australia (Brynes et al., 2012; Harris et al., 2006) and several of the US studies. The review of cirrhosis mortality found only two of nine studies obtained significant negative price/tax effects, but prices in these studies might be proxies for other (omitted) alcohol policies or drinking sentiment generally. The other cirrhosis studies contain mixed results or are sensitive to econometric specifications. Several limitations of the studies should be kept in mind, which also provide a basis for future research in this area.

...
In summary, a review of two sets of related studies casts doubt on public policies that rely extensively on price controls or higher alcohol taxes as a means to reduce abusive drinking by adults, adverse health outcomes, and related social costs. The price/tax elasticity for heavy drinkers appears to approach zero in most instances. This result is robust across countries, time periods, drinking measures, and model specifications. Improvements in price data in empirical studies might remove some uncertainty associated with this evidence. 

Nelson cites one new piece the I'd missed: Ayyagari et al, newly out in Health Economics. They used finite mixture models on individual-level data on heavy drinking incidence from the HRS (older adults, large sample) and found that their dataset effectively consisted of two groups of people. The largest group didn't drink very much, averaging 0.13 drinks per day, but was very responsive to prices. The smaller group averaged 1.86 drinks per day and really didn't seem to vary consumption with prices. The neat trick in Ayyagari et al is that when they pooled the two groups, they got about the same estimate that everybody tends to get: aggregate elasticity of around -0.4. Studies that pool results from heavy and moderate drinkers make a bit of a hash of things if we're trying to assess whether price measures curb the harms from heavy drinking. They conclude:

There is growing political support for increased alcohol taxes; however, we are cautious about predicting welfare gains to alcohol tax hikes with regard to older individuals.25 Revenue may be raised at the cost of welfare loss for many older individuals but with little reduction in externalities. Heavier drinkers are more likely to impose negative externalities than the lighter drinkers. However, our results indicate that the heavier drinking group is insensitive to price; thus, higher taxes would be unlikely to reduce negative externalities for older drinkers.26 In contrast, for the largest group of individuals, composed of moderate-to-low drinkers, the higher tax will reduce their alcohol consumption, resulting in a utility loss and loss of potential health benefits of alcohol (Thun et al., 199727), yet it is unlikely to reduce externalities.

Especially sensitive to price increases were lower income moderate drinkers.

At least Gorbachev had some idea that curbing harms from heavy drinking required something other than price and supply controls, though I do not endorse his methods.

Be very wary of policy recommendations that cite aggregate effects of prices on quantities consumed when harms are non-linear in consumption and when the heaviest consumers are least responsive to price measures.