Minimum pricing of alcohol and its impact on consumption in the UK

Abstract

A complete model of food demand is estimated for UK households, focusing on alcohol consumption both at home and outside. Using EFS data for 2005-06, several AIDS models have been estimated at different aggregation levels, thus defining a hierarchical system which allows for computation of cross elasticities between finely disaggregated food groups. At the bottom level of the system, elasticities for 9 groups of alcoholic drinks are computed, 4 of which corresponding to home consumption, 5 corresponding to outside consumption. Estimates from the upper levels of aggregation are used to acknowledge substitution and complementarity effect between these 9 groups and all other food groups consumed. Based on alcohol content of the different drinks studied, their strength and price per unit of alcohol sold is computed; a price increase is then devised, whereby all drinks must be sold at a minimum price of 50p per unit. This rise in alcohol prices, in combination with price elasticities of demand, indicates consumption changes observed according to different socio-economic characteristics (geographical, age, gender, income, socio-economic group). In spite of a slight substitution effect between alcoholic drinks and other food groups, overall consumption would decrease by 15% at the UK level. Only alcohol sold for home consumption would see an increase in prices, and reduction in sales would generally spare pubs and restaurants. While consuming more units of alcohol than other groups, higher income and high managerial groups would be less affected by this pricing policy.