Thursday 1 November 2018

The minimum pricing model is, was and will always be wrong

A study was published in the European Journal of Health Economics last month looking at the price elasticity of alcohol. It showed, for the umpteenth time, that heavy drinkers are less responsive to price rises than moderate drinkers.

.. we examine the extent to which drinkers respond to price changes by varying the ‘quality’ of the alcohol that they consume. We find that heavy drinkers are much less responsive to price in terms of quantity, but that they are more likely to substitute with cheaper products when the price of alcohol increases.

This can be filed under 'things that are so obvious only an academic could disbelieve them'. Not all heavy drinkers are alcoholics but all alcoholics are heavy drinkers - and alcoholics are plainly more likely to sacrifice over expenditure to get hold of booze. Moreover, non-dependent heavy drinkers presumably like alcohol a lot more than light drinkers.

This has been shown in many previous studies. For example...

The results indicate that both light and heavy drinkers are much less price elastic than moderate drinkers. Further, we cannot reject the hypothesis that the very heaviest drinkers have perfectly price inelastic demands.

In other words, the price-demand relationship is U-shaped, with moderate drinkers more likely to reduce their consumption in the face of price rises than either light or heavy drinkers.

There is nothing particularly note-worthy about this except for the fact that the Sheffield Alcohol Model makes exactly the opposite assumption. The authors of the new study flag this up in the text:

Scotland introduced minimum unit pricing on alcohol in May 2018, with a floor price of 50 pence ($0.67; €0.57) per unit. Modelling by Brennan et al. suggests that a 45 pence (US$0.60; €0.51) minimum unit price would affect the price of 12.5% of the units purchased by ‘moderate’ drinkers compared to 30.5% of the units purchased by ‘harmful’ drinkers. The price elasticities in this modelling predict that a 45 pence minimum unit price would decrease consumption by 0.6% for moderate drinkers, compared to a decrease of 3.7% for harmful drinkers. However, the modelling is based on pseudo-panel estimates that impose a constant price elasticity across the drinking distribution. If harmful drinkers were less price responsive than moderate drinkers, then the effects predicted in the modelling work will be incorrect. Since the marginal health and social harms are assumed to be increasing with consumption, the modelling work will thus overstate the health and social harm reduction of minimum unit pricing.

That is pretty much what John Duffy and I said six years ago in a report for the Adam Smith Institute:

By wrongly assuming that heavy drinkers are more sensitive than the general population to changes in the price of alcohol as a product category, the Sheffield model not only overestimates the putative health benefits to be derived from minimum pricing, but also overestimates the drop in overall consumption that is likely to take place (since heavier drinkers consume a disproportionate quantity of alcohol).

.. In summary, the Sheffield research does not give a prediction of what will happen under a minimum pricing regime. At best, it offers a shaky guesstimate of what might occur under a minimum pricing regime if the Ledermann hypothesis is correct, if harmful drinkers are more price-sensitive than moderate drinkers, if there is no illicit alcohol market and if there are no health benefits to be derived from moderate alcohol consumption. Since the first two of these assumptions are highly questionable and the latter two assumptions are demonstrably false, the Sheffield research has no practical merit and does not deserve the exalted status it has been afforded in the policy debate

The Sheffield model was not only instrumental in persuading the Scottish government to adopt minimum pricing, it was also instrumental in the Scottish government winning the court case that allowed it to overcome EU rules.

But it's flim flam. It was always flim flam, and it won't be long before we have solid evidence from Scotland confirming this.

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