Effects of economic factors on alcohol consumption in 14 European countries

Abstract

Kalervo Leppänen & Risto Sullström & Ilpo Suoniemi: Effects of economic factors on alcohol consumption in 14 European countries This paper analyses time series data on alcohol consumption in 14 European countries. Flexible models of alcohol consumption using quantity index data and absolute alcohol in litres per adult have been specified to find similarities in consumer preferences. The SURE method and Wald test were used to estimate and test for common parameters across the countries and to obtain the corresponding restricted estimates. We also constructed comparable price indices for alcoholic beverages and total expenditure variables in order to capture differences between the countries in price levels and the consumers' purchasing power. The hypothesis of common preferences was clearly rejected by the data. Total expenditure affects the demand for alcohol equally across the countries and the price parameters are equal within the three groups, i.e. the monopoly countries, wine producers and other countries with the exception of the Netherlands. The common estimate of the expenditure parameter suggests that alcoholic beverages are considered to be normal goods rather than luxuries. The demand for alcoholic beverages is more easily controllable by excise taxes in the monopoly countries than elsewhere. In the wine-producing countries demand is relatively price inelastic. The value of the price elasticity indicates that taxes have not been set at their revenue-maximizing levels in the monopoly countries. Analysis of absolute alcohol consumption revealed that the country-specific level constants were the major factor in explaining the difference among the countries. Economic variables, the price of alcohol and total expenditure played a subsidiary yet important role.