## Tuesday 10 July 2012

Last week, anti-alcohol advocacy group Alcohol Action NZ put out a press release where the University of Otago's Jennie Connor was quoted:
"A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks".
I got in touch with one of the authors of what has to be the study to which she's referring.

Chris Auld reported that the -1.6 price elasticity figure indeed only refers to a measure of own-price elasticity. Except it isn't quite own-price elasticity. Because the estimation technique doesn't correct for substitution effects, it combines the own-price elasticity with cross-price elasticity from other products. Quoting from Chris, with his permission:
Suppose we have two types, 1 and 2. Demand for type 1 is x_1( m_1, m_2 ), presumably decreasing in own min price m_1 and increasing in the min price, m_2, of the other type. The panel models recover d(x1 - x2)/d(m_1), so they are not estimates of own-demand slopes. For example, we might estimate -1.6 if the own-elasticity is -0.9 and the cross-elasticity is +0.7. Since we are not controlling for the cross-price, nothing can be said from these models about the effect of increasing both minimum prices---it could be that total consumption is almost invariant to min prices, but we could still generate big estimates from these models if various types of alcohol are strong substitutes. Test statistics against the null that the total effect is zero are still valid, but it's easy to misinterpret what the estimates mean
Chris also confirms that the -0.34 estimate is the one that best reflects the expected effects of an across-the-board price increase like minimum pricing, but notes that the standard kinds of time series problems makes that estimate rather less robust than he'd like.
I think it's [the estimate] probably too high, although it may be in the ballpark - a variety of evidence does suggest that min price changes are quite effective in targetting heavy drinkers.
Wagneaar found -0.28 among heavy drinkers, so I'm less worried about potential lack of robustness around Chris's estimate; if every estimate of this sort has similar robustness issues, then we might worry about systematic overestimation of demand elasticity with publication bias.

Heavy drinkers who consume cheap alcohol will be targeted with minimum prices, but so too will moderate poor drinkers who choose cheap alcohol.

Chris says he's doing some theory work showing that:
the central planner would always like to impose minimum pricing but reduce conventional taxes when confronted by consumers who are heterogeneous in an underlying demand parameter and when externalities are nonlinear in consumption---because there is an externality on the quantity but quality choice, the planner would like people to drink less alcohol, but drink higher quality alcohol.
I agree with Chris on this one - I'd posted a pretty similar point last week. The New Zealand Drug Foundation should perhaps pay attention to this one: having a minimum price should be coupled with excise reductions, not increases; NZDF has been pushing for both a minimum price and an increase in excise. If the ex ante excise were seriously below the optimum, then I'd expect a model like the one Chris is likely working up to say instead that minimum pricing lets us increase excise less than we otherwise would. But aggregate excise here isn't far out from actual external harms from alcohol. And I still worry about effects on moderate drinkers of lower income. The policy seems likely to be severely regressive.

Jennie Connor really should retract her press release or issue a correction. It leads people to believe that a minimum price will have far more effect on harmful drinkers' consumption than can be supported by the evidence. Otherwise, how much weight should anybody place on any "fact" claimed by Jennie Connor in her press releases?

In other scorekeeping, Ross Bell is right and John Key is wrong: a minimum price will increase the average quality of drink consumed, not reduce it. Here's Key:
"Instead of buying a \$10 bottle of wine that might go to \$15, they'll buy a \$5 bottle of wine that'll cost \$10. Their outlay is the same, the quality of what they're buying is worse," John Key said.
Competition among retailers, distributors, and producers ensures that drinkers get at least the minimum price's worth of value for the drink they're consuming except where there are other restrictions in the system that allows agents to accumulate rents.

But in that same article, Bell underestimates the number of standard drinks in a bottle of wine; this has the effect of reducing the perceived effect of a minimum price. Bell writes:
If the Government were to set the minimum price for alcohol at \$1.50 - a reasonable and workable price - it would mean a seven-standard-drink bottle of wine could not be sold for less than \$10.50.
Most bottles of wine are closer to 8 standard drinks than to 7. I had a quick flip through our wine rack. A Pegasus Bay riesling came in at 6.6 standard drinks. Nothing else in the rack rounded to 7 - everything else rounded to 8, except a few Aussie reds that rounded to 9. 8 standard drinks at a \$1.50 minimum price is \$12, not \$10.50. And, though I'm a moderate high-income drinker, I do often buy bottles of wine in the \$10-\$12 range. The Montana Classics range on special for \$9 is typically great value; I never feel bad about using third of a bottle in cooking at the price, and a glass while cooking is generally decent too.

Bell cites a Scottish government study suggesting that moderate drinkers won't reduce their consumption by much in absolute terms while heavy drinkers will have massive reductions in absolute consumption. If that one's based on Sheffield, and if Sheffield there is assuming constant elasticity across moderate and heavy drinkers, I wouldn't put much weight on it. Sometimes Sheffield estimates differential elasticities, sometimes they just assume constant elasticities. I'm not sure what they're doing in this particular one. And I also worry too about differential patterns in how people reduce their consumption. The Australian study I'd cited last week showed that most of the action in price increases is in reducing the number of days of light drinking rather than reducing the amount of heavy drinking, though there are other studies suggesting reasonable price elasticity of binge drinking.

Finally, Bell cites BERL's (adjusted) figure on alcohol-related harm: \$4.4 billion. That's disappointing. Ross, please remember that that study is just terrible. Again,
• They count the VSL from lives lost while simultaneously counting the total value of forgone production from premature mortality. The Ministry of Transport, who puts out the VSL measure, never does this when they tabulate the social costs of car crashes. They count the value of lives lost in accidents, the cost of injuries, and the value of production forgone due to injuries, but they don't count forgone production from those who die. The measure of the value of a statistical life is inclusive of the measure of forgone production. BERL says that VSL costs are \$1.52 billion and that labour costs, mostly from deaths, is \$1.48 billion.

• Where their model study, Collins and Lapsley, counted both the health benefits and the health costs of drinking and took a net measure of costs to the health care system, BERL took a one-line assumption that harmful drinking can never have any health benefits as justifying a move zeroing out any of the aetiological fractions where alcohol reduced costs. This was absurd and points strongly to that they just wanted to give the Ministry of Health the very very large number that the Ministry of Health wanted. Even drinking that is on net harmful can have a mix of underlying positives and negatives.

• They everywhere conflate private and social costs. Ross, you probably want to include all the costs that drinkers impose on themselves. And that's fair enough where you accurately characterise those total costs as mostly consisting of costs drinkers impose on themselves. But neither of the points above have anything to do with that. It's just poor method designed to inflate reported costs. And repeating the "costs New Zealand" line without the qualification makes people think that you're referring to a cost to the taxpayer through the health system rather than a cost drinkers impose on themselves - it's misleading; I hope not purposefully so.
Peter Dunne seems pretty sensible on this one, even if I do curse his name each and every time I want to get cold medicine that works.
"To say that we'll have a minimum price of \$12 for a bottle of wine because people who can't afford to pay \$12 shouldn't pay a lesser price, but Chardonnay socialists who can pay \$25, \$30 for a bottle of wine will still be able to get their wine. I think that's a really elitist and ridiculous argument."
The policy would reduce some harmful consumption, but it would also reduce some reasonable consumption from lower income drinkers - and from a few higher income cheapskates like me. We either need more serious work showing that the harms prevented outweighs the harm imposed by the policy, or at least coupling the policy with transfers to those negatively affected.

1. You are missing something around the quality argument. There is another option for drinkers who are after maximising alcohol intake, which is to home brew. No excise taxes or minimum prices per drink there. You can buy a home brew kit for \$100, and then it costs \$15 for 1.75kg of materials to make 40 pints. No idea on the quality (I can speculate though), but the cost per standard drink is likely to be far less than \$1. And what if you just use some sugar, brewer's yeast, and add some syrup flavouring to it - awful RTD at a fraction of the price of the liquor store down the road... Should a \$2/standard drink minimum price occur, I predict big things for the home brew industry.

2. Agree completely. I've noted that in most other posts on minimum pricing; forgot to here.

We tried making some beer at home just before the February quake. Final product quality wasn't bad. And a very cheap way of making beer. Home distillation is also legal and pretty easy. I have never seen an estimate of the elasticity of informal home supply with respect to tax.

3. Its simply reverse prohibition! Incrementily increase prices,taxes,regulatory fees etc until youve priced the product out of reality for the masses. Then comes the bootleggers the same as with the anti-tobacco movements higher prices reduces consumption theory! It just doesnt work at all.......
Well just as everybody said even people in tobacco control said higher taxes would lead to massive bootlegging in cigarettes! Look right in maryland the cigarette gestapo!
9 indicted for cigarette smuggling
They’re the tip of the iceberg,” Maryland Comptroller Peter Franchot said. “There is an explosion of cigarette smuggling going on.”

Comptroller’s Supervisory Agent Mike Madison peered through his binoculars, eyeing the black Toyota Camry as it pulled up to the Woodbridge tobacco shop. A man in a polo shirt got out, laid down a mat in his trunk and went inside. He emerged carrying several grocery bags — 10 to 12 cartons of cigarettes, Madison guessed — and drove away.
It sounds innocuous. But tobacco smugglers like these, officials say, are responsible for hundreds of thousands of dollars in lost tax revenue to Maryland each year. On Thursday, Prince George’s County prosecutors announced that they had indicted nine people — allegedly responsible for nearly \$30,000 in lost tax revenue — on criminal charges of transporting and conspiring to transport unstamped cigarettes.
http://www.washingtonpost.com/local/9-indicted-for-cigarette-smuggling/2011/09/22/gIQAhvsBoK_story.html

Just like during alcohol prohibition:
Trade In Black-Market Cigarettes: Hot, Dangerous

http://www.npr.org/templates/story/story.php?storyId=129934561
Common sense dictates that with price increases, smokers would be deterred from smoking. Instead, the increase in prices has been a boost for illicit tobacco trading.

4. Black markets via smuggling are harder in NZ, given its rather remote location. But informal supply where home brewers and distillers make their product available to a broader set of consumers seems pretty likely.

5. jeez i must be missing something, alcohol cost is very little, social context is high,
slip out to the loo, have a drink from your own, the idiots will still be there when you come back, and look can you see that old broad she looked so good wide, overflowing when you started drinking , jesus christ, how can we get out of this silly argument,

6. Regarding the proposition that 10% increase cost of alcohol lead to 16% decrease in consumption relative to other beverages. This meant to me that the other beverages were non alcoholic. And it seemed as though the drinkers were hitting the coffee bars.
Now somewhere Eric says, no the other drinks were all other drinks which confounded me.