Saturday 13 October 2012

Minimum pricing guesstimates

There's a very good post up at Liberal Vision by Chris Oakley discussing the ever-changing predictions about minimum pricing coming out off Sheffield University. I've recently read the whole Sheffield report and it really is full of the most ridiculous assumptions. Like Chris, I was particularly surprised to see that they assume heavy drinkers to be more sensitive to changes in alcohol prices than moderate drinkers.

The Sheffield team do acknowledge some quite significant discrepancies between their model and previous work. Faced with the fact that their methodology produces results inconsistent with other findings for price elasticity in heavier drinkers they do provide an analysis that is consistent with the literature…

“To enable more direct comparability with the estimates in the literature we have also generated elasticity estimates for total alcohol purchasing from the EFS, shown in Table 11. These are in broad agreement with the literature, showing that - at the highest level of aggregation – hazardous and harmful drinkers (combined elasticity of -0.21) are less price elastic than moderate drinkers (elasticity of -0.47).”

….but then ignore it.

“Note that these high-level estimates are provided for reference only and are not included in the model.”

This is an extremely important aspect of the whole exercise because if price elasticity is lower for people who are heavy consumers, the result of minimum pricing will not be a reduction in their consumption but a significant increase in the amount they spend with attendant social consequences for them and their dependants.

Eric Crampton touches on why they did this and why they're quit wrong in this post...

They note too that, when we look at own-price elasticity within product categories, hazardous and harmful drinkers are more price elastic than moderate drinkers: they're more likely to shift product categories. But that tells us zilch about what harmful drinkers do in response to a price increase for the entire product category; it would be misleading to use this kind of data to claim that harmful drinkers are the most price responsive. They're most price responsive when their preferred brand or product changes in price but they're also least responsive to aggregate changes in alcohol prices.

While we're on the subject of junk science, I was pleased to get a mention in this week's Economist re: The Spirit Level...

Since both the levels and the origins of inequality vary widely, it is hardly surprising that there is no established relationship between income gaps and financial crises. That does not mean inequality never aggravates macroeconomic instability, but unfortunately critics of inequality often exaggerate their claims. A case in point is “The Spirit Level”, a book by two British epidemiologists, Richard Wilkinson and Kate Pickett, published in 2009. They claimed that higher levels of inequality were associated with higher murder rates, lower life expectancy, more obesity and all manner of other ills. Their explanation was a medical one. Inequality literally gets “under your skin” because the stress of keeping up with the Joneses raises cortisol levels.

“The Spirit Level” caused a sensation when it was first published in Britain, probably because it reflected the post-crash Zeitgeist. Its conclusions, however, have been largely debunked. In a devastating critique, published by the Democracy Institute, Christopher Snowdon showed that Mr Wilkinson and Ms Pickett made highly selective use of statistics. Other, more careful studies show that although there is a strong relationship between individual income and health (richer people tend to be healthier and live longer than poorer ones), the link between countries’ income gaps and their citizens’ health is weak.

Now to get on train for four and half hours to get to Devon to debate happiness with Richard Layard. Should you be in the area tomorrow morning, do come along.


V said...

This reminds me, as I go to University of Sheffield... I went into the wrong uni building by mistake last week as I mixed up where my classes were. As soon as I got in I saw the sign saying Public Health Institute or whatever it was, so made an exit. I then decided it was time to have a cigarette. Right outside the door... Presumably the second hand smoke will "drift" into the building and third hand smoke from this action will stick onto the glass doors and radiate poison, giving everyone who works there cancer.

That's how it works, right?

Eric Crampton said...

I wasn't there so much looking at Sheffield but at a couple of our local loonies who were trying to claim that estimates of the price elasticity of demand for a single alcohol product (where drinkers could flip over to drinking wine from beer, for example) were relevant to discussing minimum pricing.

Here's a fun one though. The NZ Law Commission hired some shonky Australian consultants, Marsden Jacob & Associates, to discredit my stuff on alcohol. I'd noted the differential price elasticity - that heavy drinkers are less price responsive. Marsden Jacob used Sheffield to argue against us - the Sheffield model ASSUMED that heavy and moderate drinkers were equally price responsive; Marsden Jacob said the results from that model showed we were wrong to claim differential elasticity!

I'd stick with a -0.28 or lower (lower in absolute value terms) figure for the price responsiveness of heavy / harmful drinkers to minimum price rises. Auld et al find somewhere around -0.35 for all drinkers, but most of that action has to be coming from poorer moderate drinkers as both income effects and substitution effects will be hitting that category hard.

Furor Teutonicus said...

If heavy drinkers are so "Price sensetive" as they appear to think, then it can not be much of an "addiction" can it?

If it was, price would only make a difference to the crime rate, the same as the street price of heroin does.

Ivan D said...
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