(Microeconomics) New WHO signature initiative shows raising alcohol taxes could save 13000 lives per year

Many thousands of lives could be saved each year in the WHO European Region, if Member States introduced more taxes on alcohol. Across the Region, taxes on the sale of alcohol are lower than taxes on tobacco. To enhance the untapped power of health taxes, the WHO Regional Director for Europe’s Advisory Council on Innovation and Noncommunicable Diseases (NCD Advisory Council) has proposed a new signature initiative on taxation for countries to consider in their fiscal policies.

Across the Region, alcohol consumption leads to almost 1 million deaths each year from a wide range of causes, including cardiovascular diseases, cancer and other noncommunicable diseases (NCDs), as well as infectious diseases and injuries. Every day in the Region, around 2500 people die because of alcohol.

Decades of research and country experiences from all over the world have shown that increasing the price of alcoholic beverages through taxation is one of the most cost-effective policies used to lower drinking levels and alcohol-attributable harm. This has been recognized as a “best buy” intervention by WHO, delivering greater health impacts in reducing illness, disability and premature death than other policy options.

However, alcohol taxation remains one of the least implemented measures, largely due to opposition from economic operators and because price increases are generally unpopular with the public

This is why the NCD Advisory Council is launching this signature initiative that focuses on 5 key areas that will increase the untapped potential of health taxes for alcohol in the Region in an unprecedented way.

According to a study that was conducted by the NCD Advisory Council’s signature initiative working group, if countries of the WHO European Region were to introduce a minimum level of 15% tax on the retail price per unit of alcohol, regardless of the type of alcoholic beverage, it would save 133 000 lives each year.

This number could increase substantially with a higher percentage of tax share, meaning increasing alcohol excise duty should be considered a priority for public health.

Any amount of pure alcohol should cost the same – no matter the alcoholic beverage, concludes the signature initiative working group.

“We need to remember that the final price the consumer pays for the bottle is important. Consumers do not buy, for example, 10 grams of pure alcohol. They buy a bottle of beer or wine or spirits – so the price levels for any beverage should be at the same level depending on the amount of alcohol inside,” explained Dr Jürgen Rehm.

The NCD Advisory Council gathers the best expertise on the topic of NCD prevention, and inspires Member States to reach the NCD-related Sustainable Development Goals.

In promoting further implementation of alcohol control measures, the Council’s activities are in line with the WHO European Programme of Work 2020–2025 – “United Action for Better Health in Europe”.

“In the context of alcohol, taxation should be considered as a health measure, and not purely an economic instrument. Today, there is an important consensus among the Member States to follow WHO’s recommendation of a minimum 75% tax share of the retail price of tobacco, a goal that has already been achieved by more tha and half of the 53 countries in the Region. But very little is being done regarding alcohol consumption with the same measures,” said Dr Carina Ferreira-Borges, ad interim Director for NCDs, Programme Manager for Alcohol and Illicit Drugs, WHO/Europe.

“We have calculated how alcohol tax increase will impact mortality in the WHO European Region. And this data clearly demonstrates how beneficial this measure will be for people’s health,” added Dr Jürgen Rehm, member of the NCD Advisory Council, Senior Scientist at the Institute for Mental Health Policy Research and the Campbell Family Mental Health Research Institute at the Centre for Addiction and Mental Health, Toronto, Canada.

Figure #1, illustrates the problem that arises in the free market for alcohol with no government intervention. The Social Marginal Benefit (SMB) is less than the Private Marginal Benefit (PMB) as the PMB is not reflecting the social benefit. The vertical difference between SMB and PMB is the negative externality, the mental and physical health consequences such as suicide, cardiovascular disease and increase the healthcare burden. In the free market, consumers of alcohol will maximise their private utility, and consume at the QM where PMB meets PMC. Consequently, overconsumption of alcohol at the sociallyoptimal point (QS) is less than the quantity bought and sold in the market (QM). Hence, a welfare loss is created, shown in the shaded blue triangle, (ABC), illustrating the loss in social surplus due to the overconsumption of alcohol. Therefore market failure occurs.

To reduce market failure, the European government has suggested implementing an ad valorem tax, an indirect tax that is imposed on spending to buy goods and services. Producers will bear part of the tax burden (shaded area between Ps and Pm), which reduces the incentive of production as the cost of production for alcohol increases. In Figure #2, as PMC shifts to PMCt, the quantity bought and sold in the market will reduce alongside from QM -> Qt, at the socially optimal quantity. Price increases from Pm -> Pt, due to higher private costs, consumers will now have to pay a higher price. Decreasing consumption to Qt helps eliminate the market failure and welfare loss, the external costs society experiences.The addictive nature of alcohol results in inelastic price elasticity of demand. The reduction in quantity demanded may not be as significant as expected by the European governments as consumers are less responsive to price changes, reducing the effectiveness of the tax. Secondly, as SMB is inelastic, consumers will bear a greater burden (shaded area between Pm and Pt) in the form of higher prices, increasing their expenditure, whilst decreasing their disposable income and standards of living. Although the tax is regressive as it's an indirect tax, it's more progressive than a specific tax and thus, the tax changes per price results in alcohol being more expensive for lower higher-income individuals as the absolute value of the tax is higher. Thirdly, this illustrates an unrealistic situation as it's often difficult to determine the tax level that is equivalent to the negative externality to eliminate the welfare loss. Lastly, the formation of the black market may emerge as price increases in the market. Individuals who are willing to pay less than the taxed price will form demand in this sector, which can decrease the demand of small businesses such as alcohol companies and sellers. Thus, workers may become unemployed and the firm's revenue will drop from (PmxQm) to (PsxQt), as they're losing customers to the black market or the tax increases the costs of alcohol. This will undermine the tax and may even increase costs because of further regulations that may be implemented.

Altervienelty, the effectiveness of the tax won't have a significant impact on consumers in the short run because of the addictive nature of alcohol. Governments can take advantage of the inelastic demand for alcohol to decrease consumption by imposing higher tax rates. European Governments can further intervene in the alcohol market by using the higher tax revenue (Pt-Ps)xQt earned to educate the harmful effect of consuming alcohol. This will decrease the number of consumers and discourage new consumers by raising awareness regarding alcohol consumption. In the long run, this will alternate individuals' mentality and prevent or delayalcohol use. As the tax is only affected by those who consume the product, eventually the elasticity of alcohol will rise as people manage to stop consuming or decrease their consumption due to the high prices.

In conclusion, the article outlines the key concept of intervention to correct the market failure. This policy suggested by WHO can be considered effective in reducing the quantity of consumption and negative externalities, whilst increasing market efficiency by reducing the overallocation of resources. Although a specific tax can be implemented, it's more regressive and targets lower-income individuals. The tax eliminated the deadweight loss to fulfil the government's objective to correct Market failure.

The article published by WHO refers to the key concept of intervention, where European governments have been advised to intervene with the workings of the market by placing a minimum tax rate on alcohol under the advice of WHO. Alcohol is a demerit good because it's harmful to those who are consuming it and society. It creates a negative externality of consumption, a spillover effect is imposed on the third party, and results in market failure. Thus, the solution in the form of a tax raises the price of alcohol, whilst lowering supply and consumption alongside.