What is the optimal quantity of beer to drink?

Question number 3 from What would Keynes do?

If I enjoy drinking beer. How much should I drink?

Key quote

“My only regret in life is that I did not drink more champagne.”

John Maynard Keynes.


If something is good to do – does it mean it is good to do it to excess?

This question allows us to consider various economic concepts

  • Rational choice theory
  • Are consumers rational?
  • What is a demerit good – and what are the implications for economics?
  • Diminishing marginal utility.
  • Behavioural economics and poor decision making
  • External costs of individual choices.

A basic principle in economics is that where we maximise utility by consuming up to the point where marginal utility (satisfaction) equals the marginal cost.

  • Consuming at the margin – means we consider the costs and benefits of conuming one more good.
  • Just because we enjoy eating beer or cake – doesn’t mean we would necessarily enjoy consuming another one. What counts is not the total utility or average utility – but the utility of the next unit.

 

diminishing-returns

This is an example (with admittedly very expensive beers!)

  • After 3 beers, the marginal utility starts to fall.
  • After 6 beers the cost of buying a beer is greater than the marginal utility.
  • This suggests, that the optimum number of beers is six.

However, is it as simple as trusting our judgement of our marginal utility?

The great economist Irving Fischer was a supporter of prohibition – banning alcohol. (He also was an early critic of the dangers of smoking and red meat.)

The perspective of Fischer was that alcohol is a demerit good – One characteristic of a demerit good is that individuals can make poor decisions. They can under-estimate the costs of alcohol and over-estimate the benefits. It is a normative judgement that individuals make poor decisions – and this can necessitate government intervention.

For example, we may consume six beers a night – but ignore the long-term impact on the quality of our work and the impact on our liver.

Another issue is that of self-control. At the start of the evening, we may feel the optimal number of beers is two – because we have to revise for our exams in the morning. However, after drinking two beers – the alcohol has an effect on our mental perceptions – and we decide to have more than we intended.

However, the next morning when we wake up with a hang-over – we regret our lack of control the night before.

For a recovering alcoholic, the optimal number of beers is always zero – because one drink and they can fall off the wagon.

A final issue is – what about external costs – if we drink three beers but have an accident because we lose control of the car – there is a very high external cost to third parties.

Conclusion

Personally, I don’t drink. Over-rated.

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One thought on “What is the optimal quantity of beer to drink?

  1. Using diagrams, explain why the price elasticity of demand for bp petrol is different than the price elasticity of demand for petrol in general.

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