Price floors and externality correction

Griffith, Rachel, O’Connell, Martin and Smith, Kate ORCID: 0000-0003-3229-0439 (2022) Price floors and externality correction. The Economic Journal, 132 (646). 2273 - 2289. ISSN 0013-0133

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Abstract

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.

Item Type:	Article
Official URL:	https://academic.oup.com/ej
Additional Information:	© 2024 The Author(s)
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance
JEL classification:	D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis D - Microeconomics > D6 - Welfare Economics > D62 - Externalities H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Date Deposited:	12 Jul 2024 17:15
Last Modified:	16 Jul 2024 12:06
URI:	http://eprints.lse.ac.uk/id/eprint/124244

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