Business Insight 20th Sep 2016

One tequila, two tequila, three tequila, floor

Could a floor price fix Australia's alcohol problem?

An innovative analysis by our researchers could unstick a decades-old debate over alcohol taxation policy.

The new paper, by Anurag Sharma, Fabrice Etilé and Kompal Sinha, provides much-needed insight into how alcohol consumption would look under a different alcohol pricing regime, by applying a brand new technique.

“Alcohol consumption is among the top three risk factors for global disease burden behind tobacco smoking and high blood pressure,” says Dr Anurag Sharma, of Monash Business School's Centre for Health Economics, the lead author of the paper.

“It has been established that increasing the price of alcohol leads to reduction in consumption - especially by heavy drinkers drinking at harmful levels.”

Can a floor price fix solve Australia's alcohol problem

Policy fails to target problem drinking

Alcohol prices in Australia are affected by a complex tangle of taxation regimes resulting from decades of competing policy objectives. As a result, wine is subject to a tax on its value, while a volumetric tax applies to spirits - often at a much higher rate. Alco-pops are the target of yet another tax. The result is policy that fails to target problem drinking.

Problem drinkers can buy cask wine and pay as little as five cents tax per standard drink. Meanwhile a far higher burden - up to 80 cents tax per standard drink - falls on some spirits. Policy experts have long been in favour of a simple and consistent approach.

One such policy is to set a minimum price for a single standard drink of $2. That would mean a beer containing 1.4 standard drinks could not be sold for less than $2.80. A bottle of wine containing seven standard drinks could not be sold for under $14, etc.

It has been established that increasing the price of alcohol leads to reduction in consumption - especially by heavy drinkers drinking at harmful levels.

Dr Anurag Sharma

Minimum unit price policies have already been applied in Russia and Canada. But in the UK doubt has impeded implementation. Would it actually work?

In 2013 the British government refused to apply a minimum unit price to alcohol on the basis of a lack of conclusive evidence it would deter problem drinking and not penalise other drinkers.  In Australia, a lack of evidence has also impeded change. But thanks to Dr Sharma and his colleagues the evidence basis is now substantially richer.

The new paper shows a minimum unit price would cause significant falls in the amount of alcohol consumed by at-risk drinkers, with much smaller falls among low-risk drinkers.

“The effect of MUP in reducing alcohol purchases would be concentrated on households purchasing at risky levels, and the subsequent drop in their alcohol consumption would yield significant benefits for public health,” the paper argues.

The median drinker would reduce consumption by less than a tenth of one standard drink per day while a drinker at the 95th percentile would reduce drinking by over half a standard drink per day, the model shows. A drinker at the 97th percentile of consumption is most affected, reducing consumption by 0.9 standard drinks per day.

Minimum price on alcohol

Significant health benefits

Risky drinking tends to be concentrated among households with lower incomes, who also tend to buy alcohol that would rise in price under a minimum unit price policy. Dr Sharma and colleagues caution that the policy would affect income related inequality, but that this must be viewed in context.

“Heavy drinkers are more likely to belong to lower socio-economic status groups. However our research has shown the average tax burden due to a minimum unit price for heavy drinkers is around $10 per week per person, whereas the health benefits are much higher,” Dr Sharma said.

The study used an existing data set containing 884 Australian households who purchased alcohol, surveyed over 52 weeks by a survey company. The households were required to scan all items purchased, yielding a data set rich in detail, including brand and price, although excluding alcohol bought and consumed outside the home.

This data fed into a model that is able to use the characteristics of the households in the data set to model how they would be likely to react under a different pricing regime.

“Since a minimum unit price is not implemented widely yet, and there is no real scenario data post implementation, the method we use allows us to create a counterfactual scenario under a $2 minimum unit price. It subsequently lets us calculate the reduction in consumption under such a policy,” said Dr Sharma.

The innovative statistical technique, developed by renowned MIT Professor Victor Chernozhukov, permits the development of detailed counterfactual scenarios using the characteristics of rich data sets.

The evidence it has helped create could lead to real change in the lives of Australians, says Dr Sharma.

“Drinking alcohol at harmful levels is strongly correlated with violence and poor health outcomes. A $2 minimum unit price has the potential to significantly reduce the negative externalities of alcohol consumption.”

By Jason Murphy

  • anurag-sharma-pr

    Dr Anurag Sharma

    Senior Research Fellow, Centre for Health Economics Monash Business School

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