The effects of price on alcohol consumption and alcohol-related problems

Alcohol Research & Health,  Wntr, 2002  by Frank J. Chaloupka,  Michael Grossman,  Henry Saffer

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The study found consistent evidence that increases in the price of alcohol resulting from higher monetary prices significantly reduced the number of alcoholic drinks consumed by young adults in the past year. Moreover, the analyses provided strong evidence that drinking in this age group is addictive in the sense that a strong interdependency existed among past, current, and future alcohol consumption. That is, current drinking decisions depended on past alcohol consumption and influenced future consumption. These findings are generally consistent with studies employing data from the National Longitudinal Survey of Youth to estimate alcohol demand using a model that also accounts for the addictive nature of alcohol consumption.

The finding that drinking by young adults can be considered an addictive behavior has important implications for the effects of price on alcohol consumption. For example, when Grossman and colleagues (1998) used models that ignored the addictive aspects of alcohol consumption to analyze their data, they estimated an average price elasticity of alcohol demand of -0.29. When they used the model accounting for the addictive nature of alcohol, however, the estimated average long-term price elasticity of demand was more than twice as high at -0.65, indicating that price had a much greater influence on alcohol consumption. Moreover, the estimate of the long-term price elasticity of demand was approximately 60 percent higher than the estimate of the short-term elasticity (which, in turn, was almost 40 percent higher than the average estimate derived using nonaddictive models).

Using the estimates derived from models accounting for addiction, Grossman and colleagues (1998) predicted the effects of changes in beer taxes on consumption. For example, the investigators examined the effects of a tax increase that would have matched the taxes on the alcohol in beer to those on the alcohol in distilled spirits in 1951 and then accounted for the rate of inflation since 1951. Such an increase was estimated to have reduced average consumption by more than 40 percent in 1982 and 1983 (the middle years of the sample).

Taken together, these findings on the relationship between price and demand for alcohol have important implications for policies aimed at curbing alcohol use and abuse among youths and young adults. First, this research demonstrates that increases in the price of alcoholic beverages, which could be achieved by raising alcohol taxes, effectively can reduce drinking and heavy drinking. Second, the results demonstrate that the long-run price elasticity of demand when accounting for the addictive aspects of drinking is well above both the short-run elasticity and the elasticity obtained when ignoring addictive aspects. This finding implies that previous estimates of the effects of tax increases on alcohol use among youths and young adults and its consequences significantly understate the benefits of higher taxes. Third, the finding that young adults are farsighted in terms of future alcohol consumption implies that policies that raise the perceived future costs of alcohol use and abuse can significantly reduce c urrent drinking.