03 March 2009

Scottish Parliament to Help Establish Cartels

In an attempt to beat the customer from both sides, the Scottish Parliament has announced plans to fix a minimum price per unit of alcohol sold[1]. From the consumer's viewpoint, this is the worst of both worlds. At least with an increase in alcohol duty, the extra that the consumer pays goes into the public purse, so they should, in theory, get something back in return. With price fixing proposals such as this one, the extra revenue goes to the supplier.

This just strikes me as a cowardly cop-out. The Scottish government is on a puritanical crusade against alcohol, but it doesn't want the bad publicity that would go with an increase in pub closures as a result of increasing alcohol duty, especially in the midst of a recession and so soon after the smoking ban, so it has decided to shaft the consumer by effectively levying a tax on some alcoholic beverages, but allowing the supplier to keep the revenue.

In almost any other market, if suppliers colluded to fix a minimum price, they would be breaking the law and potentially subject to substantial fines, as in the case of the supermarket milk cartel[2]. What is being proposed here is even worse than that. With a voluntary cartel, there is a limit to the damage that can be done to the consumer, as the agreement will always be seriously unstable; there is always a risk of one of the participants breaking rank, or another participant entering the market and undercutting the cartel. With government enforced price-fixing, the consumer is completely over a barrel; none of the participants can break the agreement and nobody can enter the market at a lower rate.

Of course, in the long run, the laws of supply and demand can render this sort of scheme useless. By forcing prices above the natural market rate, you move further up the supply curve, meaning suppliers have an even stronger incentive to sell, so while the price may go up, the rest of the service to the customer may improve to compensate. I wouldn't be surprised to see more drinking establishments opening up (or at least fewer closures), pubs offering free food and nightclubs offering free entry, all with the intention of milking the newly created cash cow of price-fixed alcohol. Unfortunately, the vast majority of political decision making makes no reference to economic realities and unintended consequences.

1.http://news.bbc.co.uk/1/hi/scotland/7917824.stm

2.http://news.bbc.co.uk/1/hi/business/7132108.stm

7 comments:

Mark Wadsworth said...

Good summary.

Do you have a view on whether this is an intended or an unintended consequence?

Paul Lockett said...

Thanks

I'd guess this is an unintended consequence. A lot of the SNP's policies seem to be very simplistic, so my first impression with this type of policy is that they just haven't thought it through.

There is another possibility that has occured to me after looking at the follow up story on the BBC, which says:

In outlining its proposals the Scottish Government stressed it would need to work closely with the UK Government to control pricing and promotions of alcohol brought into the country from south of the border.

That seems to have created a situation where, either the UK parliament follows the Scottish parliament's lead, or the Scottish parliament puts some kind of border check in place. It isn't impossible that the SNP have considered this approach as a way to establish a more traditional border between England and Scotland.

Mark Wadsworth said...

"my first impression with this type of policy is that they just haven't thought it through."

Like their idea of scrapping Council Tax and replacing it with Local Income Tax - apparently the rules of economics that have held since time immemorial don't apply North Of The Border.

I shit ye not.

Anonymous said...

I am scottish i love a drink this rule is a joke take the ale off us and we are nothing!!!!

Paul Lockett said...

Mark, that was precisely the policy I had in mind as the prime example of simplistic thinking. It was something I commented on in an earlier post.

Another SNP plan I've commented on previously, which was possibly even more ridiculous, was the idea of extending a shared equity scheme for first time buyers to improve affordability, which would have been bad enough at the best of times, let alone when prices were falling and affordability was improving anyway!

Either of those plans in isolation would have been bad enough, but if enacted together, they would have been a recipe for total disaster.

I find the whole local income tax approach to be particularly strange for a party like the SNP which has independence as its primary goal. On one hand, they vigorously exert a national claim over the revenue from North Sea Oil under Scottish waters, but on the other, they are happy to give up any national stake in the economic value of Scottish land, creating almost perfect conditions for foreign absentee ownership.

It's that kind of inconsistency which makes me conclude that they just aren't thinking things through.

Paul Lockett said...

Following on from that last comment, I had a quick look at the SNP website to make sure I wasn't mis-representing their position and stumbled on this sentence:

It is time to move on so Scotland’s precious natural resources can help fuel our nation’s future prosperity.

Which makes me wonder why they are pursuing policies which go in exactly the opposite direction.

Martin said...

I was in a penology lecture earlier today, and my lecturer, a guy named Roy Light, quested the effectivness of the scottish paliament's measure.
I personally agree with what Paul is saying and believe it will have negative consequences, but we shall have to wait and see.