Economic illiteracy in The Economist

The Economist published an article about alcohol two weeks ago...

A sober brawl  

Alcohol firms promote moderate drinking, but it would ruin them

The subheading is nonsense, based as it is on a risible study produced by the Sheffield alcohol team and the UK Temperance Alliance t/a the Institute of Alcohol Studies.

In Britain more than 100 producers and retailers have signed a “responsibility deal” and promised to “help people to drink within guidelines”, mostly by buying ads promoting moderation. However, if these campaigns were effective, they would ruin their sponsors’ finances. According to researchers from the Institute of Alcohol Studies, a think-tank, and the University of Sheffield, some two-fifths of alcohol consumed in Britain is in excess of the recommended weekly maximum of 14 units (about one glass of wine per day). Industry executives say they want the public to “drink less, but drink better”, meaning fewer, fancier tipples. But people would need to pay 22-98% more per drink to make up for the revenue loss that such a steep drop in consumption would cause.

The print edition makes things worse with this graphic...

I have written about this study before - see here and here. The authors show such a basic misunderstanding of economics that it should disqualify from from commenting on the alcohol business ever again.

In short, they assume that alcohol revenues would decline by 38 per cent (£13 billion) if everyone drank within the government's evidence-free guidelines. They then assume that the industry would have to raise £13 billion from somewhere to keep its head above water. The figures in the graphic above show what they reckon drinks would cost if the industry were to pass that £13 billion on to customers.

The whole premise of the study is ridiculous. If the industry sold less alcohol, it would have fewer costs. Unless it has very high fixed costs, most industries could withstand a 38 per cent decline in sales (look at the tobacco industry in Britain in recent years, for example). It might become less profitable, depending on whether consumers switched from low margin drinks to high margin drinks, but it would not be not 'ruin them'.

People in Britain drank half as much alcohol in the 1950s than they did fifty years earlier. Did this ruin the booze industry? No. Of course it didn't. Why would it?

It's disappointing to see The Economist falls for this obvious rubbish. I wrote a letter to the editor about it...

Your article about alcohol (October 19th, p. 93) suggested that the price of beer, wine and spirits would have to rise dramatically ‘to make up for revenue loss’ if everybody drank within the government’s guidelines. Revenue is irrelevant. Only a fraction of the amount spent on alcohol goes to the producers as profit. A third goes straight to the government in the form of alcohol duty and VAT, and a significant proportion goes to retailers. Much of the rest is spent on the product itself.

If fewer products were sold, the cost of production would fall. There is no reason to assume, as the study you cite does, that the industry would have to raise prices by £13 billion to compensate for sales falling by £13 billion. The viability of a business depends on profit, not revenue.

It wasn't published.