Literature Review

This week I’ve been mostly preoccupied with the literature review for my research proposal. I’ve done my best to research the most relevant and up to date papers that have been published in the same field as my topic area. There is a growing amount of research being conducted in the area of consumption of addictive substances and response to changes in price. This is mainly due to the fact that currently, the only widely used method to curve alcohol consumption and other addictive substances is through taxation. That is, via taxation governments increase the price of alcohol with the goal of reducing alcohol consumption and more importantly reduce the external costs placed on the economy such as health related issues. The attempts to reduce alcohol consumption have so far proved to be futile with nearly twenty five million adults reported to have an alcohol dependency and five hundred thousand deaths on average per year occurring from alcohol and cigarettes (Bernheim & Rangel, 2004). It is well established in economic theory that addictive substances such as alcohol feature price inelasticity. However, the price elasticity of alcohol in previous studies has not fully explained why the taxation of alcohol has not been successful in changing consumption behaviour. Moreover, taxation of alcohol has been found to not have a substantial impact on external costs associated with alcohol consumption.

The question is then what is a more efficient way of reducing alcohol consumption and external costs associated with heavy consumption? Gallet (2007) identified two main factors that explain why taxation does not have a considerable effect on the consumption of alcohol. Number one was price elasticity varied over types of alcoholic beverages. Number two was that younger consumers are less price sensitive than older consumers. Meaning that taxation is relatively ineffective for solving problems associated with drinking among young people. Furthermore, taxation could be improved by applying different tax rates to alcoholic beverages that are more price inelastic. Manning et al. (1995) found that moderate consumers are more responsive to price than those who are heavy consumers. This means that as taxes increase those who produce the external costs (heavy consumers) are relatively less affected than those who produce no external costs (moderate consumers).

Amongst the current research there has been no studies done on the different effects that advertising has on alcohol consumption between moderate and heavy consumers of alcohol in Australia. The point of conducting a study such as this will be to find out if advertising effects heavy consumers more than moderate consumers. If so then reducing alcohol advertisement and providing education on safe levels of alcohol consumption may be more viable avenues to reducing the external costs associated with alcohol.

References:

Bernheim, BD & Rangel, A 2004, ‘Addiction and Cue-Triggered Decision Processes’, American Economic Review, vol. 94, no. 5, pp. 1558–1590

Gallet, CA 2007, ‘The Demand for Alcohol: A Meta-analysis of Elasticities’, Australian Journal of Agricultural and Resource Economics, vol. 51, no. 2, pp. 121–135

Manning, WG, Blumberg, L & Moulton, LH 1995, ‘The Demand for Alcohol: The Differential Response to Price’, Journal of Health Economics, vol. 14, no. 2, pp. 123–148