Minimum unit pricing: unintended consequences of regulation

As minimum unit pricing in Scotland beds in, anti-alcohol campaigners are beginning to hedge their bets. Already we’re hearing it’s not a magic bullet”, other measures will be needed” – including the restoration of the hated alcohol duty escalator and alcohol-only” aisles in off-sales premises. The stated intention of campaigners supporting MUP is to stop the sale of cheap strong alcohol at pocket money prices” and thereby protect vulnerable drinkers” – a coy term for alcoholics. But what about the unintended consequences?

There are two likely ones from this kind of government price intervention that economists have identified. One is market displacement, the other product substitution. Let me explain. Market displacement is what happens when consumers wake up one morning and find that a popular product has suddenly rocketed in price and they can’t afford it, so they resort to the black market to buy something similar and cheaper. 

An example of this occurred in Russia in 2010 when the government introduced a minimum price of 220 roubles for a half-litre bottle of vodka. Drinkers voted with their feet and started buying moonshine on the black market. This stuff contained ingredients such as embalming fluid and liquid anaesthetic to make it more intoxicating. Such was the scale of this market displacement that in 2012 the Russian government reduced the price to 185 roubles – approximately what it cost before it introduced the minimum price. Will there be a growth in the black market for alcohol in Scotland? Almost certainly.

But what about product substitution? Before MUP a 3-litre bottle of Frosty Jack’s strong white cider was selling for £4.25. After MUP the price rocketed to £11.25 and sales fell off a cliff. A vindication for MUP then? Well, if you’re the kind of drinker who necks a 3-litre bottle of cider in one session you’re probably not a cider connoisseur, you’re doing it to get off your head. 

These people haven’t gone away, and they now have two choices: buy black market hooch or seek a cheap, non-alcoholic substitute. What might that be? Well, a gram of spice” (a synthetic cannabis substitute that is devastating the homeless and prison populations) costs £6, and a bag of heroin £8. So, the perverse outcome of introducing MUP in Scotland is that a 3-litre bottle of strong white cider is now 46% more expensive than a gram of spice and nearly 30% more expensive than a bag of heroin. So, what do you think happens next? In what rational universe could this outcome possibly be seen as a victory for public health or a vindication of minimum pricing?

This is what happens when government throws a price regulation into a free market and it enters culture. Health campaigners have persuaded themselves that controlling the price mechanism would enable them to socially engineer the sober society. Unfortunately, in the real world it’s not that simple.

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