Should Tax on Alcohol Be Increased?

Readers Question: evaluate the economics for and against the uk government further increasing the tax on alcohol in order to reduce its consumption?

I have answered a similar question before: Should government increase tax on Cigarettes?. There are many similarities and if you understand the basics of market failure you can easily apply the same arguments to different types of goods.

The main reasons for increasing taxes on alcohol include:

1. Raise Revenue for the government.
2. The Social Cost of alcohol are higher than the private cost. Therefore, a tax is an attempt to make people pay the social cost.
3. Discourage a De Merit Good. Alcohol is a demerit good, in that people often underestimate the cost of drinking excessively – i.e. alcohol is one of the main causes for premature death amongst young adults, it is also one of the main causes of fatal accidents

The difficult is working out the optimal tax because taxes on alcohol are already relatively high. To evaluate the social costs of alcohol we need to try and place a monetary cost on:

Social Cost of Alcohol

1. Days lost due to overconsumption of alcohol.
2. Cost to NHS and emergency services of alcohol related accidents
3. Cost of premature death resulting from alcohol abuse
4. Cost of alcohol related abuse.

Arguments against raising tax on alcohol

1. Already high
2. Demand inelastic
3. Regressive tax
4. Would encourage black market consumption and imports from Europe

See also: Should Legal age of alcohol consumption be raised to 21?