Scotland's 50p per unit minimum alcohol price

Alcohol is an imperfect information good. Those who consume it don't take fully into consideration the complete costs of drinking it on themselves, or on others. There are clear negative externalities, such as the cost to the NHS of treating alcohol related disease. Drinkers also overestimate the private benefits to themselves.

Overall then the market consumes more alcohol than is optimal.

Scotland has decided that they will impose a minimum of 50p per unit of alcohol to try to address the problem of people abusing alcohol. This means that a drink that contains two units of alcohol (say a pint of lager) cannot be sold for less than £1. Of course there is no effect if the price is already over a pound.

The effect of this minimum price therefore depends on the current price. Setting a minimum price below the market equilibrium has no effect at all, while setting a price above equilibrium will reduce demand. Of course it can also raise the willingness to supply!

The aim of this policy is to overcome the 'cheap alcohol' available in supermarkets (such as ownbrands) and 'happy hours'. These promote heavier drinking and, as some people know, this is habit forming!

The real question is will it be effective? Alcohol is already heavily taxed, restricted by age limits and only available from licenced premises. There is also a concerted effort to educate people about the true effects of drinking (although this is far less than the effort made on smoking). So far these have failed to eliminate the problem.

The PED of alcohol is likely to be inelastic. Therefore the effect on current drinkers will be small, but maybe it will stop some people from starting to drink. Therefore the pay-off will come in the long-term. What is clear is that dealing with imperfect information goods needs a set of complementary measures which reinforce each other.

The Guardian has details here