Warning: post contains economics. Some readers may find themselves bored silly. In such cases, Dr No recommends taking a tea-break and returning to the post only when the sense of boredom has completely dissipated.
Economists are keen on a concept known as elasticity. There appear, from Dr No’s primitive researches on the matter, to be a disconcerting number of elasticities in economics. Naturally enough, economists dress all these elasticities up in hieroglyphics, but inspected through the lens of common-sense, economics stands revealed as a study of rubber bands, albeit rubber bands that drive economic activity, but rubber bands nonetheless.
One of the rubber bands at the heart of economics is that known as price elasticity of demand. Translated back into English, PED, as it is known, measures the extent to which sales of goods and services are affected by their price. Products with a high PED are price elastic (a small change in price causes a big change in sales), while those with a low PED are price inelastic (big price changes causes little change in sales).
When the sums are done, and PEDs given numerical values (PED = % change in sales divided by the % change in price), things turn out rather simpler than might be expected, given that we are in economic territory. A PED of zero indicates perfect inelasticity (sales are unaffected by price); a PED between zero and one (price inelasticity) means a percentage change in price is matched by a smaller percentage change in sales (10% increase in price causes a 5 % drop in sales); a PED of one indicates unit elasticity (a percentage change in price is matched by an equal change in sales); and a PED of greater than one (price elasticity) means a percentage change in price is matched by a bigger percentage change in sales (10% price increase causes 20% drop in sales).
Now – if you have got this far – you may be wondering what all this talk of rubber bands and sums has to do with Bad Medicine. Well, as it happens, quite a lot, when it comes to NICE, and their recent recommendations on minimum pricing for alcohol. NICE, you may recall, underpinned their recommendations with a series of weather forecasts that relied on a process called economic modelling; and it is fair to say that price elasticities are to economic modelling as rubber bands are to model aeroplanes. Remove the elastic, and neither get off the ground.
Sitting at the heart of the forecasts used by NICE is a raft of assumptions about the price elasticity of alcohol. Surprisingly, there is in fact remarkably little solid widely accepted data on alcohol’s price elasticity, but in most (but not all) studies the overall PED is less than one, that is to say alcohol is price inelastic – in other words, a percentage increase in price is matched by a smaller percentage drop in sales. Data on price elasticity for different types of drinkers (moderate/heavy) is even sparser, but what there is suggests that heavier drinkers are relatively even more price inelastic, and furthermore, in the chilling words of the authors “we cannot reject the hypothesis that the very heaviest drinkers have perfectly price inelastic demands”. Perfect inelasticity, recall, means price has no effect whatsoever on sales. Very heavy drinkers will drink, whatever the price.
This information was available to ScHARR (the outfit that did the modelling) – it is quoted in the report – and so to NICE. But its obvious implications appear to have been ignored. If, as NICE suggest, heavy drinkers will face a £160+ hike in the cost of their annual booze bill following the introduction on minimum pricing, then far from cutting back by a corresponding amount, relatively price inelastic heavier drinkers will cut down perhaps by a small amount, and the ‘perfectly inelastic’ heaviest drinkers may not cut down one drop.
Dr No does not doubt that at a population level, minimum pricing for alcohol will reduce overall sales of alcohol. But the population approach, beloved as it is by our Public Health Johnnies, is a myopic view that fails to see the detail. Overall alcohol consumption may decline, but for significant numbers, because of relative price inelasticity, the drop will be trivial, and for some, the drop will be non-existent; and, for many in these groups, there will be – to use another economist’s favourite – a significant opportunity cost (money spent on one thing can’t be spent on something else). One does not need to be an economist to see what this will mean in poor fixed income households. Alcohol consumption will remain unchanged, and the money will come from another budget. Diet will worsen, children will suffer, and in extreme cases, roofs over heads will be lost.
All of this is of course exactly what common sense suggests. What strikes Dr No as odd (to say the least) is the fact that despite both common sense and the ScHARR report, with all its academic finery, indicating that alcohol minimum pricing is likely to be a dud, NICE have jumped on the government/RCP/CMO wagon and recommended a policy which, even when viewed through the specialist lens of the economist, is not only doomed to trivial effect in its primary aim, but – far worse – is all but guaranteed to aggravate the position of those least able to accommodate the vicissitudes of fallacious social policy.
Funding may, of course, have something to do with it; or it may be latent prohibitionism rearing its ugly head. Or maybe the explanation is far simpler. The folks at the National Institute for Health, Clinical and Anything Else Anybody Will Pay Us For Excellence may be well-intentioned, but not the sharpest pencils in the box: or, to put it more prosaically, they may be NICE, but dim.
The “perfectly inelastic” heavy drinkers families are too be met with a financial challenge soon according to the headlines in todays Telegraph. Worth a read.
Welcome back you toad 🙂
The Oldest Sage Witch’s Highland Granny has asked me to pass on a few words:
She says the story is true.
“Big Wull MacTavish worked for a bakery. He delivered the loaves to all the shops in the area. For this he received a little buff envelope every Friday containing his meagre wage – probably about £2.00 per week or less.
Every Friday night he went off to the pub on his way home. He liked to tipple once a week with his friends. Now, Big Wull McTavish was a generous soul and since he had just been paid, he would buy his cronies a drink or two. Or three or four. The hours would pass. Wull could hardly stand but he managed eventually to get himself out to his bread van waiting outside. He would climb in and then collapse. He would have remained there slouched on the floor until the morning but his two best friends Jock and Tam knew the routine. They took him home to his long-suffering wife who knew this would be another week with mouths to feed and no wages coming in. She would have to take in some washing, ironing and mending from the ladies in the big houses.
Sometimes she wished Jock and Tam didn’t know the way home. Then she would remember that Wull was a generous, hardworking man and decent father when sober. So she forgave him.
So it was just as well Jock and Tam would never abandon Wull. They were his faithful Clydesdales who pulled his bread cart.”
Doubtless those NICE people who read Bad Medicine will see the moral of this true story.
I think that raising prices on alcohol will not solve any problems because alcohol is a unique product. People use it because of how it makes them feel, to escape their worries, or in some cases because of addiction. because it is a unique product and people can’t replace it with something else, they will simply just spend the extra money, and like it was mentioned above, have less money to spend in other places.