Friday 31 July 2009

And further on price elasticity

Seamus reminds us that we need to look at relative elasticities.

Brian Easton provides advice that the Law Commission deems "helpful". His advice is:
It is generally assumed that the demand for alcohol is largely price inelastic. However, it is believed that the main groups whose consumption is sensitive to changes in price are:
  • the young;
  • binge drinkers; and
  • heavy drinkers.
Easton is right that alcohol consumption is relatively inelastic: around -0.44 for beer, which means that a 10% increase in price reduces consumption by 4.4%. But we tend to expect that the folks whose consumption produces greatest harms would also be the folks whose consumption is relatively least elastic. Price elasticity basically tells us how many substitute commodities there are out there for the consumer. If the individual views there as being no substitute for alcohol, his price elasticity will be very low; if he views a Coke as being a not too bad alternative, his price elasticity will be rather high. And, indeed, what numbers I've seen on it show that heavy drinkers are less price elastic than are moderate drinkers.

If we decide to be charitable, then Easton's just reminding us that even heavy drinkers are price sensitive. Which is true. But they're less price sensitive than moderate drinkers. Even if you accept the premise that there are some heavy drinkers who could be made happier by virtue of a tax increase that helps to keep them on the straight and narrow, moderate drinkers' consumption is more strongly affected. Suppose we have a 10% price increase. Moderate drinkers reduce their consumption by about 4.4%; heavy drinkers reduce their consumption by about 2.8%.

Now, how much does a heavy drinker benefit from a 2.8% reduction in consumption? How much is a moderate drinker harmed by a 4.4% reduction? And what are the relative proportions of both in the country? BERL said that 1/6 are "harmful" drinkers, which I still think is a gross overestimate of the true proportion. But let's take it for now. It then has to be the case that a single heavy drinker reducing his consumption by 2.8% is benefited by at least six times as much as a moderate drinker is harmed by a 4.4% reduction in his harmless drinking for the tax increase to potentially be efficiency-enhancing. If the true proportion is 1/10, change it to 10 times. Recall that for the wowsers, consumption of 2 pints per day is harmful; the midpoint of BERL's "high risk" category is 110 grams: 11 standard drinks, or about 5 pints. How big a price increase would be necessary to get the high tail consumers down to "moderate" levels? Well, they'd need to reduce their consumption by about 65%. If your price elasticity of demand is -0.28, then you need a 232% increase in price to reduce consumption by 65%. And of course for that level of a price increase, the moderate drinkers reduce their consumption pretty much to zero. All of these numbers are just back of the envelope, for now. But I don't think they're far out.

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 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.


1 comment:

  1. Anybody who thinks the Law Commission report was other than, to support their predjuces, is unfortunately delusional.

    PS. Keep up the independant thinking