Pricing Policies and Alcohol Tax: Targeting Specific Alcohol Consumption Behaviors

Thea Yutong Liu 

Jeremy W. Bray

Abstract 

Excessive alcohol consumption generates negative externalities and is costly to individuals and society, but these externalities and costs vary with specific consumption behaviors. Alcohol tax and pricing policies are often used to reduce total consumption, but little is known about how these policies affect specific drinking behaviors. To better inform alcohol pricing policies, we estimate price elasticities separately for the frequency, quantity per occasion of consumption, and the number of binge drinking episodes. The results suggest that drinking behaviors are extremely elastic to the price of light beer compared to that of regular beer or wine, which indicates that restrictions on light beer sales and the implementation of light beer specific taxes are more potentially more cost-effective interventions for reducing excessive alcohol consumption. We find only negative price elasticities (ranging from -2.023 to -0.314) in single price models but some positive price elasticities in multi-price models, suggesting that substitution effect exists among consumption and is associated with increased alcohol intake. Additionally, we find evidence that indicates different effects on the extensive and intensive margins of drinking, both across types of alcoholic beverage and across the three drinking outcomes. The results imply that alcohol excise tax can push population’s alcohol consumption to align with drinking guidelines more closely, but actions across the board should be concurrent to avoid substitution behaviors.

Key words: excessive alcohol consumption, binge drinking, price elasticity, excise tax