Pre-Gaming, Binge Drinking and a Doomed Economy

*This was something I wrote for an Economics Blog. Thought I’d just keep this blog alive by sharing it here. Feel free to trash/comment on anything I say.

Earlier in the year, David Cameron (PM of the UK) announced price revisions for alcohol purchases in the UK to deal with errant and irresponsible drinkers.  His office cites that “irresponsible drinking costs the U.K. £21 billion a year. There were almost a million alcohol-related violent crimes and 1.2 million alcohol-related hospital admissions in the country last year.” (WSJ).

Of course, we know that a high amount of alcohol consumption is a negative externality and adversely affects the economy. Productivity and efficiency drops. People would not report to work on time and even if they do report to work after a night of debauchery, their productivity levels would not be optimal. They’d also take days off from work to recover from their alcohol-related problems, especially for those hospitalized. Employers would find the costs incurred from this to be high. They may be forced to downsize or rehire. Unemployment would thus rise. With a rise in unemployment, so would crime. Apart from the usual larcenies to fund day-to-day living necessities, other forms of crime would involve alcohol related crime due to alcohol addiction. Addicts who’ve lost their jobs and sources of income would probably steal in order to gain access to alcohol just to satisfy their cravings. This would be an after effect of bankruptcy perhaps. If the British government doesn’t intervene, this could bear terrible long-term consequences. Long run output and demand would get affected because of this and growth, as a consequence of that.

To tackle all of this, the government had decided to impose a price floor on alcohol drink purchases in the UK. As we’re all aware, price floors deter alcohol suppliers from lowering prices any lower than they’re supposed to. A price floor would be effective in this case if it were above the equilibrium price. As shown in Figure 1,

it would be illegal for alcohol suppliers to set their prices any lower than the price floor. The government pegs it at a level where supply exceeds demand, at a position higher than the equilibrium position where supply is meeting demand. This deters more people from buying alcohol and “”pre-gaming,” or loading up on cheap store-bought booze” (WSJ) before getting fully sloshed at a pub or nightclub. In addition, it also reduces violence and crime rates.

When you read the article by the Economist, you can’t help but wonder what all the hoopla is about. After all, “Since 2004 alcohol consumption has dropped by one-eighth, to 8.3 litres per person per year, according to an official survey.” (Economist). The Economist goes on to argue that David Cameron’s proposed intervention measures are based off of outdated data.

Even if it were indeed based off of outdated data, imposing the aforementioned price floor measure would supposedly do little to really hurt the alcohol trade. According to the article, companies are looking to boosting their profit margins as opposed to achieving greater sales. This could be due to the fact that alcohol doesn’t go bad easily. It can be preserved for long periods of time (for a year or more). So there isn’t any wastage costs incurred by alcohol companies. Therefore, even if short run demand drops, retailers are able to make better profits from the sale of alcohol, exceeding usual profit margins.

Just going off of The Economist article, it seems unnecessary for the government to intervene, but based on statistical evidence alone, in the first paragraph, it makes it imperative for the government to step in. While alcohol consumption may have dropped over the years, it still seems like a big problem in the UK based on just the hard facts and it thus makes full sense for an external corrective force to step in to correct this externality.

References

http://online.wsj.com/article/SB10001424052702304724404577297814271968518.html

http://www.economist.com/node/21564220

Image Courtesy:

http://ingrimayne.com/econ/AllocatingRationing/PriceAsRationer.html

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