Problem Focused Exercise: Is binge drinking an economic problem?
1
Scenario
The government has become increasingly worried about binge drinking, particularly
amongst the young. In the 2008 budget taxes on alcohol were substantially
increased. This exercise examines why excessive drinking may be an economic
problem and the possible effects of government policy.
Task 1
Read the following extract and then answer these questions.
(a) Explain the economic argument that the alcoholic drinks market should not
be subject to government interference because the ‘free market’ allows
‘consumer sovereignty’.
(b) Expand on the discussion of the problems of alcohol consumption in the
article to explain the externalities associated with drinking alcohol. Be precise
in your argument in relating to this economic concept.
(c) Why does such market failure give an arguable case for government
intervention to improve social welfare by reducing consumption of alcohol?
Use a diagram to illustrate this.
(d) Show, again using a diagram, how taxes on alcohol may improve social
welfare given such externalities.
(e) The argument that the free market unfettered by government interference is
best depends, in part, on consumers being the best judge of their own
welfare. Is that a problem here?
(f) What policies other than taxation are mentioned in the article that might help
reduce consumption of alcohol by the young? Are these likely to be more
successful than taxation? Argue a case.
feedback page 3
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
2
Binge drinking youngsters
Based on: Diversionary tactics for binge drinkers by Mary O'Hara, The Guardian, Wednesday
January 23 2008
We know because of surveys, the
large increases in alcohol-related
illnesses, and reports of police cells
and Accident & Emergency
departments dealing with the
unwelcome outcomes, that many of
us are drinking excessively, particularly
at the weekends.
Positive Futures, the government social
inclusion programme, has published
the latest research on binge drinking
among young people. It focuses on
some of the country's most deprived
areas where the impact of excessive
drinking on health, crime and family
breakdown is most acute. The survey
sampled 1,250 young people between
the ages of 10-19. In face-to-face
interviews they obtained their opinions
on, firstly, what causes their excess
drinking and, secondly, what might
persuade them to stop it.
In the interviews over 40% responded
that they began drinking at under 13
and 50% replied their parents either
condoned or didn't care about their
drinking. The majority obtained their
alcohol from local supermarkets or
shops. An even more worrying 75%
reported that they had either been
violent or in trouble as a direct result of
binge drinking. The main conclusion of
the research is that the youngsters'
excess alcohol consumption is a
symptom of wider social problems.
There have been many proposals for
reducing alcohol abuse in the young:
making alcohol less accessible by
prohibiting cheap, bulk-buy
promotions; raising the price by
additional taxation; public health
campaigns to shock people into
taking the health risks seriously; and
more prosecution of shop owners
selling to underage drinkers. The survey
asked the youngsters directly what
they thought would work. Forty-six per
cent of the young people interviewed
considered organised sport and leisure
activities would help, slightly fewer
considered the provision of better
health information helpful, while
around a third thought measures to
tackle underage sales in shops would
be an obstacle to purchasing. Positive
Futures have 123 schemes across the
country which directly engage with
young persons. The responses to these
schemes were favourable by the
youngsters involved who suggested
they helped them cut back on
drinking. Policymakers face difficult
questions as to how to produce real
and enduring changes in behaviour.
Police, the drinks industry, voluntary
sector and policymakers are meeting
in London to discuss this research and
the light it throws on young people's
drinking habits.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
3
Feedback Task 1
(a) What is the argument that the free market gives the most desirable outcome?
We need to consider both sides of the market – consumers and producers and to
answer this.
The argument starts with the view that consumers can best decide what they want
to buy with their incomes – they know what they most like (not the government).
Demand for drink will reflect consumer choices and consumers will purchase more
as long as they feel the price makes buying the extra worth it to them.
Producers decide what to produce, how to produce it and how much to produce
to maximise their profits. The firm will not supply more of a good unless they can
cover the opportunity costs of doing so. Suppliers will provide more of the good as
long as this adds to their economic profits.
So what happens if consumer demand increases for alcoholic drinks? The price
increases and producers see an opportunity to make more profit by producing
more. They respond to consumers’ wishes - this is what is meant by ‘consumer
sovereignty’. However, in the long run, if profits continue to be high more firms will
enter the industry and the additional supply will then drive down prices so that they
reflect costs and not super-normal profits. (This argument also assumes a competitive
market structure and not a monopoly with barriers to entry.)
(b) What are the externalities?
Let’s start with the definition: Externalities are effects of consumption or production of
a good on third parties – here, that is people not directly involved in consuming or
the making of the alcoholic drinks.
What are these effects in this case? The article mentions police cells and A&E
departments which lead us to consider disorderly behaviour and violence that may
affect other people in the high street or indeed the home. The use of the A&E
department means that the resources of the NHS are being used as a result of the
drinking and the cost of this is an externality effect on all taxpayers and other users
of A&E departments who will face increased waiting time, etc. These are negative
externalities. There are other externalities here. Can you think of any? Note it is NOT
the effect directly on the person’s health, etc. that is the externality – that is their
choice.
(c) Why does the existence of negative externalities lead to a problem of social
welfare? The externalities mean that the drinkers are not taking account of the full
costs of their actions. If they had to take account of these extra costs consumption
would be lower.
The price mechanism is not sending the correct signals and we have what is known
as market failure and oversupply of alcohol. We can use figure 1 to show the effect.
We draw the demand and supply curves in the standard way (the numbers are
purely illustrative). The market for alcohol only takes into account private costs,
giving a price of £2.00 and 6,000 units bought. However, if we include all costs,
including the externality costs, this would shift the supply curve to the left and the
price would be higher at £3.00 and the number of units sold would be reduced to
5,000. At the moment drinkers are ‘getting it on the cheap’ and not paying the full
costs of their consumption and this means fewer resources available to others.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
4
Figure 1: The market for alcohol
Price
£
Supply including private
and externality cost
Supply including
only private costs
6
5
Demand
5000
6000
Quantity
(units of alcohol)
(d) What is the rationale for government intervention?
This welfare economics problem means that the unfettered price mechanism is not
sending the correct signals, too much alcohol is being consumed from society’s
point of view and there is an arguable case for government intervention. If the tax
rise is successful it will raise the brewers and other alcoholic drink manufacturers’
costs as they have to pay the excise tax, leading the supply curve to move to the
left – less supply at each price - and the price of alcohol to rise as they pass some of
the tax increase onto their customers (i.e. a movement towards the supply curve
that includes the externality costs in figure 1).
(e) Are consumers the best judge of their own welfare?
The argument in part (a) relied on consumers being the best judge of what they
should buy for their own happiness or welfare. However, that is disputable here for
several reasons: (i) children may not be the best judge of their own welfare but need
guidance; (ii) people generally may be myopic – concentrating on short-run
pleasure and not the long-run affect on their health, for instance, which they later
come to regret; (iii) people may not have all the information, or be able to
understand the information, to make an informed choice; (iv) people may feel
pressurised by others into making a particular choice.
(f) What other methods are available?
The article mentions several - restrictions on sales outlets etc., trying to change
people’s choices (what example does the article give of this?). There are
advantages and disadvantages to each method – none are fully successful.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
5
Task 2
Read the extract below and answer the following questions:
(a) What does the article suggest will be the effect of putting up the tax on
alcohol? Is this in line with economic theory? Use a diagram in your answer.
(b) What will be the effect of what the article suggests on brewery and other
drinks manufacturers’ profits?
(c) Are brewers and other alcoholic drink manufacturers likely to absorb all the
tax increase in the long run?
feedback page 6
Irresponsible drinks discounting continues despite Government action
Based on: Shops defy attempt to curb binge drinking, The Observer, Sunday March
23 2008.
The Chancellor in the recent budget
raised taxes on beer, wine and spirits.
This follows warnings from doctors on
the health consequences of binge
drinking, particularly among the
young. It has been argued that both
supermarkets and corner shops have
been selling drink too cheaply and
irresponsibly. The increased tax is paid
by the brewers and they would
normally recover this by passing on the
cost increase in the prices they charge
shops and supermarkets.
warns that the aggressive market they
are trading in has put them under
huge pressure. The letter is reported as
saying 'we are not confident the
Budget will result in material increases
in retail prices' because of continued
discounting by major supermarkets. It
goes on to say that ‘We regret to say
that we cannot absorb the increases
in costs that the Budget would seem to
demand'. It goes on to ask suppliers to
help 'by absorbing these increases
within your own company'.
However, a leaked letter reported in
The Observer from a large retail outlet,
with over six hundred stores covering
the country, suggests that shops are
defying attempts by the government
to crack down on cheap alcohol and
excessive drinking. The letter from the
Bargain Booze chain to its suppliers
It appears that, rather than putting
their prices up with the increased
taxes, retailers are attempting to force
the brewers to absorb the increase so
that they can continue aggressively
price-cutting. Brewers who raise their
prices have been warned their
contracts may come to an end.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
6
Feedback Task 2
(a) What does the article suggest will happen to price?
The article suggests that the price of alcohol will not rise because the retailers are
forcing the brewers to absorb the tax.
What diagram should we use?
We should use a demand and supply diagram as we want to know the effect on
price and the quantity bought and sold. We would expect the supply curve to shift
to the left as shown in the diagram below – the increase in taxes is an increase in
costs to the brewers. This causes the price to rise and the quantity to fall. However,
the increase in price (at least in the short run) is not as high as the increase in taxes –
economic theory does suggest there will be an absorption of a part of the tax by the
brewers as they compete to maintain business. The size of this fraction depends on
the elasticities. Try drawing the diagram and see what happens if the demand
curve is much flatter (on the same scale this would mean a more elastic demand).
Figure 2: The market for alcohol
Price
£
Supply including
additional tax
Supply
Additional
Tax
6
5
Demand
5000
6000
Quantity
(units of alcohol)
(b) How does profit relate to price and quantity?
First consider the definition of profit:
Profit = revenue - costs
where revenue = (price X quantity) and cost is (average cost X quantity).
So what will happen to profit in this case?
Since average cost is going up and nothing else is changing, profits will fall.
(c) Can brewers continue making lower profits in the long run?
This is unlikely - it can only be the case if they were making an excessive profit before
- which is unlikely given the power of the retailers. The rise in costs is more likely to
drive some brewers out of business and as the quantity supplied drops, prices will rise
– that is, there will be a movement towards long-run equilibrium.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
Reflection
Yes
7
Partly
No
Do you understand:
1. What costs drinkers do not pay for and why this is
important in explaining externalities?
2. Why economists are concerned with this problem?
3. How equilibrating forces are likely to lead to the tax
being passed on in the long run?
If your answer is ‘No’ or ‘Partly’ to any of the above, which of the following do you
now intend to do to improve your understanding?
1. Ask for guidance from my tutor?
2. Read a relevant section in a textbook?
3. Work though some example questions?
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Is binge drinking an economic problem?
8
Notes for lecturers
Objectives of the exercise and prerequisites
Learning Focus: Appreciating why binge drinking is an economic problem and
developing an understanding of markets, incentives and market failure. The aim is
to get students using economic ideas rather than focusing on the social and
medical details.
Threshold Concepts that are pivotal to this learning are welfare economics and
incentives. The modelling concept of equilibrium is also used.
Prior Knowledge Required
Students need an understanding of demand and supply. It can be used, with
lecturer assistance, without prior knowledge of concepts such as externalities as a
way of introducing the topic. Alternatively it can be used as reinforcement of ideas
introduced in a lecture.
Sequencing and timing
1.
Task 1 asks students to read the extract and then answer a question. A number
of subsidiary questions are provided to help students through the analysis.
2.
The task can be carried out on an individual basis but students may benefit
from working in groups. Students can be asked to give a presentation of their
findings to encourage participation (this can be certain selected groups rather
than all in order to fit the time scheduling).
3.
It is possible to set task 1 without task 2.
4.
Feedback for task 1 should be given before students attempt task 2.
5.
If task 1 is carried out in groups and time is given for around three short
presentations by student groups, the exercise is likely to take 40 minutes.
Otherwise the full task can be done in this time.
Copyright: Embedding Threshold Concepts Project
08/10/08
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.