The Effects of Price Elasticity on Alcohol Consumption: ECON6038 Essay

This essay delves into the complex relationship between the price elasticity of alcohol and its consumption patterns. It begins with an introduction that highlights the historical context of economic studies and public policies aimed at regulating alcohol consumption, often focusing on the impact of taxes on alcohol prices. The essay then explores the concept of price elasticity, explaining how changes in alcohol prices can inversely influence consumer behavior, from wine to beer. Furthermore, the essay examines the effects of price changes and policy interventions, demonstrating that increases in alcohol prices generally lead to decreased consumption, thereby potentially mitigating associated health and social problems. The analysis draws on econometric studies to illustrate the inverse relationship between price and consumption and discusses various factors like licensing restrictions and income that influence demand. The essay concludes by arguing that price elasticity, specifically the use of excise taxes, can be an effective policy intervention to reduce alcohol consumption and its related negative consequences, particularly among harmful and low-income drinkers, and that these interventions can be successful in reducing alcohol consumption.

Running Head: PRICE ELASTICITY AND ALCOHOL CONSUMPTION
Price Elasticity and Alcohol Consumption
Name
Institution

PRICE ELASTICITY AND ALCOHOL CONSUMPTION 2
Price Elasticity and Alcohol Consumption
Table of Contents
Introduction......................................................................................................................................2
Elasticity of Price and Alcohol Consumption.................................................................................3
Concept of Price Elasticity and Alcohol Consumption...............................................................3
Effects of Price Change and Alcohol Consumption as Policy Intervention................................4
Conclusions......................................................................................................................................6
References........................................................................................................................................8

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Introduction
For many years, economists and policymakers have taken considerable efforts and
resources to evaluate the correlation of taxes levied on alcoholic beverage and its effect on
alcoholic princes. Many studies have investigated the impact of tax on price increases and how it
attributed to an increased alcohol consumption leading to a broad spectrum of behavioral and
health problems. Alcohol consumption was related to aggression and commitment of other
crimes (Österberg, 2011). Formulation of public policies which affected the price of alcohol also
influenced the consumption of alcoholic beverages. The shift in price of alcohols shifted the
alcoholic consumption behavior as well and financial policies regarding alcohol market has to be
constrained as well. The two variables – alcohol price and alcohol consumption negatively
reinforced each other. Principle states that fluctuations of alcohol price from one to another
influences the consumer behavior in a diversified manner. The changes in the behavior varied
from wines to beer to distilled spirits. Normally, values of elasticity are shown to differ between
nations and the shift in values dependent on time and period (Wagenaar, Maldonado-Molina &
Wagenaar, 2009). Therefore, alcoholic addiction during short-term price elasticity has a lesser
supreme value as compared to the long-term elasticity.
Thus, studies have confirmed a reverse association between the demand and price of
alcohol, which means that the lower the price of alcohol, higher the demand for alcohol.
Moreover, the government public policies which increase taxes on alcoholic-beverage, the prices
are subsequently hiked leading to the lowering of public alcoholic consumption and related
abusive behaviors. It lessens the associated social, health and cultural setbacks as well. The

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current paper will examine the role of high price policy as an intervention in reducing alcohol
consumption based on elasticity of price (Herttua, 2010).
Elasticity of Price and Alcohol Consumption
Concept of Price Elasticity and Alcohol Consumption
Econometric studies denote “price elasticity” as a transformative tool to decrease the rate
of public alcohol consumption. Negative price elasticity implies that price change and alcohol
consumption are inversely related: a price hike result in decrease in alcohol use and the decline
in the price of alcoholic beverages that leads to a spike in consumption of alcohol. Thus,
elasticity value offers strength to the economic framework controlling the consumption of
alcohol. Alcoholic drinks are believed to be elastic with price change; given the price elasticity
has a higher absolute value. For instance, if the price elasticity is about -1.5, it means a one
percent rise in the alcohol price would lower alcohol consumption by around half percent
(Mäkelä & Österberg, 2009). In addition, if the elasticity’s absolute value is less than one,
alcohol market’s nature tends to become price-inelastic. Thus, this implies that a change in
percentage of alcohol use is lesser than alter in percentage of price-point. For instance, if the
price elasticity has a value of about -05, it implies that a 1% rise in price of alcohol will lower
the consumption of alcohol by about half percent. Price inelasticity though, never implies that the
consumption is not responsive to shift in pricing. Instead, this implies that the change in alcohol
use is lesser than the adjustment in pricing. For example, if the elasticity rate of price is 0.00, this
means that the price shift will not affect the consumption of alcohol (Anderson, Chisholm &
Fuhr, 2009).

PRICE ELASTICITY AND ALCOHOL CONSUMPTION 5
Effects of Price Change and Alcohol Consumption as Policy Intervention
There exists is strong research demonstrating that price increase of alcohol beverage
lowers the consumption of alcoholic beverages and the degree of alcohol driven challenges. In
many nations, a stimulation of tax-induced price hikes brings a reinforced response in alcohol
consumption – and also adds to state tax earnings. It conversely minimizes the state expenditures
associated with alcohol and other drugs health issues (Bouchery, Harwood & Sacks, 2011).
Nearly all studies of econometrics have confirmed that a rise in the prices of alcohol prices
results in a decrease in alcohol use and vice versa. Alcoholic beverages demand is impacted by
different factors like licensing restrictions, income and sociocultural barriers. In regard to the
price, the current literature (Wagenaar, Tobler & Komro, 2010) apparently suggests that the
alcohol demand slopes downward with hike in price and also alcohol demand is comparatively
inelastic, with –0.5 being recorded in internationally researched meta-studies.
Furthermore, exercise taxes decide how much the producers of alcohol will profit from
the last retail price that a consumer will be paying. Increases in exercise tax will increase the
final retail prices of the alcohol (Elder, Lawrence & Ferguson, 2010). In the United States (US)
market of alcoholic beverages, for example, an over shifting of exercise taxes happens. This
means that the prices of alcoholic products have increased more than the quantity of the tax
increases. The tax change rates increases the final retail prices (called the pass-through rates)
vary from 1.2 to 4.2 based on the particular brands of alcohol (Meng et al., 2014).
According to Chaloupka (2010), the price elasticity of alcohol shows that the increase in
prices of this product will lower the demand. Minimal alcohol and beverage prices in British
Columbia and Canada were changed over the year of 1989-2010. The longitudinal models of

PRICE ELASTICITY AND ALCOHOL CONSUMPTION 6
alcohol use was related with prices and different economic data was established as autonomous
data that a 10 percent minimum price rise of alcohol lowered its use comparative to other
beverages by around 16.1 percent. The time-series approximations showed that a minimum
price hike by 10 per cent that lowered the use of liquors by almost 6.8 percentage, of wine by
around 8.9 percentage, and ciders by around 13.9 percentage, of beer by about 1.5 percentage
and of all alcohols by around 3.4 percent (Chaloupka, 2010).
Moreover, there exists an extensive literature of researches that evaluates the price
change effects on the level of alcohol intake. The concept of price elasticity revolves around on
the variable of alcohol consumption percentage rate, which happens when the alcohol price is
increased by one percent, while maintaining other factors constant. More recently, Wagenaar,
Salois & Komro, (2009) established a 40 studies price elasticity changes – found that the sales
data were around -0.17 for beer products, -0.30 for wine beverages, and -0.29 for spirits.
Compared with studies founded on aggregated data, studies utilizing individualistic self-reported
data established that alcoholic beverages demand was more sensitive to change in the price.
Since alcohol is addictive in regard that increases in the past use result in an increase in the
present consumption, the immediate decrease in alcohol use linked to price increases in the
present time (short run) can lead to future decline in use of alcohol in the prospect (long run).
Studies have shown that the demand of alcohol appears to be more responsive to price changes
over the long-run rather than the short-run. Some researches have demonstrated that only social
drinking; however, offensive drinking (splurge drinking) is receptive to price changes, though
apparently to a smaller degree (Wagenaar, Salois & Komro, 2009).

PRICE ELASTICITY AND ALCOHOL CONSUMPTION 7
Finally, it can be contended that due to alcoholic beverages addiction, price elasticity of
alcohol cannot be symmetrical. This means that a decline of a certain degree of prices of alcohol
prices will have a higher effect on the consumption as compared to a similar degree of price
increase achieved afterwards. Another premise for the asymmetrical price elasticity can
attributed to the fact that alcohol are so easily accessible, where a gradual increase of alcohol
available would not elevate its use since the market of alcohol is already saturated. The
saturation was utilized as an explanation and used for the findings in the Nordic tax study
regarding alcohol. (Wagenaar et al., 2009).
Conclusions
The current paper has shown that alcohol consumption is dependent on the price changes
in terms of percentages. It has also been studied that alcohol based price promotion can lower its
intake.. There remains the reciprocal relationship that is to be utilized to reduce alcohol
consumption. Hence, indexing to excise taxes, which acts on ‘inflation’ to cease substantial tax
fall ensures that elevated prices have sustained effect on drinking and its outcomes. Therefore, it
can be argued using price elasticity by increasing alcoholic beverages prices can be a good
policy intervention in minimizing the health related plus social incidents of alcohol in addition to
substance abuse. Price seems to be specifically efficient in lowering consumption amongst
harmful drinkers and low-income drinkers (O’Mara, Thombs & Wagenaar, 2009).

PRICE ELASTICITY AND ALCOHOL CONSUMPTION 8
References
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policies and programmes to reduce the harm caused by alcohol”. Lancet.
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Bouchery, E.E., Harwood, H.J. & Sacks, J.J. (2011). “Economic costs of excessive alcohol
consumption in the U.S., 2006. American Journal of Preventive Medicine.
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Chaloupka, F.J. (2010). “Beyond tax: The need for research on alcohol pricing policies”.
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Elder, R.W., Lawrence, B. & Ferguson, A. (2010). “The effectiveness of tax policy interventions
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Herttua K (2010). The effects of the 2004 reduction in the price of alcohol and alcohol-related
harm in Finland. A natural experiment based on register data. Helsinki, The Family
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Mäkelä, P. & Österberg, E. (2009). “Weakening of one more alcohol control pillar: a review of
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Meng, Y., Brennan, A,. Purshouse, R., Hill-McManus, D., Angus, C., Holmes, J. & Meyer, P.S.
(2014). “Estimation of own and cross price elasticities of alcohol demand in the UK – A

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