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We evaluate the impact of a price floor for alcohol introduced in Scotland in 2018, using a difference-in-differences strategy with England as a control group. We show that the policy led to the largest reductions in alcohol units purchased among the heaviest drinkers – the group who, at the margin, are likely to create the largest externalities from drinking. The price floor is well targeted at heavy drinkers because they buy a much greater fraction of their units from cheap products and switched away from these products strongly, with only limited substitution towards more expensive products. We show that if the marginal external cost of drinking is at least moderately higher for heavy than lighter drinkers, then a price floor outperforms an ethanol tax. However, more flexible tax systems can achieve similar reductions in externalities to the price floor, but avoid the large transfers from public funds to the alcohol industry that arise under the floor.
Authors
CPP Co-Director, IFS Research Director
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
Research Fellow University of Wisconsin
Martin, previously Deputy Research Director, is a Research Fellow at IFS and Professor of Economics at the University of Wisconsin.
Research Fellow London School of Economics
Kate is an IFS Research Fellow and an Assistant Professor at LSE, interested in public finance, industrial organisation and applied microeconomics.
Working Paper details
- DOI
- 10.1920/wp.ifs.2021.4021
- Publisher
- Institute for Fiscal Studies
Suggested citation
R, Griffith and M, O'Connell and K, Smith. (2021). Price floors and externality correction. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/price-floors-and-externality-correction-0 (accessed: 28 March 2024).
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