Research and analysis

Estimation of price elasticities of demand for alcohol in the UK

Analysis to estimate the price elasticities of demand for different types of alcohol in both the on- and the off-trade in the UK.

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Estimation of price elasticities of demand for alcohol in the UK

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HM Government collected £10.5 billion in alcohol duties in 2013 to14, around 2% of all tax revenue collected by HM Revenue and Customs (HMRC). Most of the revenue came from wine (£3.7 billion), beer (£3.3 billion) and spirits (£3.1 billion), with cider making a small contribution to receipts (£0.3 billion). Alcohol duty’s contribution to HMRC receipts has remained around 2% since 2005.

Price elasticities of demand for alcohol products estimate the change in alcohol consumption as a response to a change in the price of alcohol. These elasticities are one of the key inputs to HMRC’s estimates of the tax revenue impacts of changes in UK alcohol duty rates. When the duty rate increases, the tax revenue per unit increases; however, as this is passed on to consumers through higher prices, we expect that they will consume less. Conversely, for a cut in the duty rate, tax revenue per unit falls, but when this is passed onto lower prices, we estimate that consumption will increase. We quantify such behavioural effects using these elasticity estimates.

This paper estimates own- and cross-price elasticities in both the on- and the off-trade for all five major categories of alcohol - beer, wine, cider, spirits and ‘ready-to-drinks’ – using data from the Living Costs and Food Survey from 2007 to 2012.

Published 16 December 2014