Minimum Pricing on Alcohol

Posted by: Evangel on: February 19, 2011

• In: Articles | Section 2: Microeconomics
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According to the article “Report backs minimum drink prices” from BBC news, the government of Scotland is planning to set a price floor on alcohol. This plan is introduced due to negative externality of alcohol consumption; the third party is suffering from the bad effects, such as violence on streets and increasing health problems, caused by consumption of alcohol.

(Figure 1) Negative externality of alcohol consumption

As shown in figure 1, the Marginal Private Benefit (MPB) is higher than the Marginal Social Benefit (MSB). This means that the over-consumption of alcohol is harmful to others who do not consume alcohol as much. Thus, welfare loss is created (illustrated as the shaded area). To internalize this externality, the quantity should be decreased from Q to Q_OPT, and follows the change in price from P to P_OPT.

After conducting research, researchers at Sheffield University found out that “a price as low as £40 per unit could save hundreds of lives per year.” With this study in mind, the Scottish government is planning to set a minimum price per unit of alcohol.

(Figure 2) Price floor: minimum price per unit of alcohol

If the price floor is set, the products that contain alcohol would rise. As shown in figure 2, not only would the quantity of alcohol decrease from Q to Q₁, the price of per unit of alcohol would rise from P to P_f. This would be added to the cost of companies that produce alcoholic drinks. With increase in the cost in producing their goods, the firms would raise the price of the product, decreasing the quantity demanded for alcohol.

The government believes that with this price floor, many lives would be saved, for it would “cut crime and improve quality of life.”

Tags: Alcohol, Consumption, Cost, Demand, Government, MPB, MSB, Negative externality, Price floor, Scotland, Scottish, Supply, Welfare loss