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Socio-economic determinants of theconsumption of alcoholic beveragesJames A. Johnson a & Ernest H. Oksanen aa Department of Economics , McMaster University , CanadaPublished online: 28 Jul 2006.

To cite this article: James A. Johnson & Ernest H. Oksanen (1974) Socio-economicdeterminants of the consumption of alcoholic beverages, Applied Economics, 6:4, 293-302, DOI:10.1080/00036847400000008

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Socio-economic determinants of the conszmption of alcoholic beverages

J A M E S A. JOHNSON and ERNEST H. OKSANEN Department of Economics, McArlasfer U~li~-ersity, C(mada

I . I N T R O D U C T I O N

Alcoholic beverages have an unusual status anlong the vast variety of consumer goods inasmuch as they, along with a small number of other commodities (notabiy tobacco products and certain ph3rmaceuticals) Ilave traditionally been singled out for some form of social control. Consequently, the a~alysis of the demand for alcoholic beverages has particular relevance to the formulation of public policy.

Researchers from several disciplines have been attracted to the study of alcoholic beverage consumption. The nature of their analysis varies, of course, depending upon the primary interests of the investigator. Typically, non-economists have tended to ignore economic variables, while economists have tended to ignore non-economic factors.'

In this paper we estimate dynamic demand equations for three categories of alcoholic beverages through pooling Canadian time series data for each of the ten provinces. While our analysis concentrates on economic factors, we experiment with a variety of sociological variables which might play a role in explaining demand. Our results suggest that the latter also contribute significantly to explaining the behaviour of consumption.

In Canada, as in many other countries, alcoholic beverages play an important role in public policy discu~sion.~ It is worth briefly noting some aspects of the current discussion concerning government intervention in the alcoholic beverages industry in Canada, and some characteristics of the production and sale of these beverages. Debate centres to a

The authors wish to thank their colleague Frank T. Denton for his useful suggestions and Mrs Emmy Atkinson and Mrs Christine Feaver for their excellent research assistance. ' Studies concerning economic asFects of alcoholic beverage consumption include STONE et a!. (1954), H O U T H A K K E R and T A Y L O R (1970), N I S K A N E N (1962). and H O G A R T Y and E L Z I N G A (1972). Some studies have incorporated such variables as the fraction of the total population which is of 'drinking age' (HOUTHAK K E R and TAYLOR, 1970, p. 61) and the fraction of 'foreign born' in the population (HOG A R T Y and ELZINGA, 1972). A notable exception to the concentration upon purely economic variables in demand analysis is the classic P R A I S and H O U T H A K K E R (1971, Ch. 11) study of consumer budgets, where some use is made of data on 'social classes' (involving two categories), occupations (three categories), and regions.

THE COMMISSION OF INQUIRY INTO THE NON-MEDICAL USE OF DRUGS (LeDain Commission) (1973, p. 37) con- cluded that alcohol is Canada's most serious non-medical drug use problem and that the costs of excessive consumption fall largely on others rather than the direct consumer.

Prbrfed in Great Britain 0 1974 Chapman arrd Hall Ltd.

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294 Jait~es A. Jolrnson m d Ernest H. Oh-sanen

considerable extent around the issue of 'optimal' t a ~ a t i o n . ~ Spirits producers contend that an undue tax burden falls upon their industry compared with the brewing industry, and maintain that the physiological effect of alcohol is identical regardless of the type of alcoholic beverage in which alcohol is 'embedded'. Consequently, they argue, rates of taxation should be based upon 'alcol~ol content' in various beverages, and this would result in a shift of tasation in the direction of the brewing industry. The brewers, on the other hand, maintain that a given amount of alcohol has a significantly less deleterious effect when consumed as beer rather than spirits. The Addiction Research Foundation in Ontario (POPHAW et al., to be published) advocates taxing on the basis of 'a!cohol content' and increasing the overall level of taxation to curb consumption.

In Canada the retail package sale of spirits, imported wines, and imported beers, is conducted on a monopoly basis in each province by liquor stores owned and administered by the provincial government. In certain provinces domestic wine producers are allowed to operate retail outlets (although domestic wine is sold also through government liquor stores). Domestic beer is sold by the package either in monopoly outlets owned and administered by the brewing industry acting as a retail cartel, in provincial liquor stores, or in certain licensed outlets (for instance hotels, in some provinces). Only in Quebec is beer sold in 'ordinary' retail outlets such as grocery stores.

In the next section we discuss our model and report some econometric results. In the subsequent section we consider certain tax policy implications, and in the final section we suggest some conclusions. The time span is 1955-1971, with 1956 providing the first observation for the dependent variable in each equation. A data appendix which provides details of data sources and of the methods used to construct unpublished series is available upon request.

11. S P E C I F I C A T I O N A N D E S T I M A T I O N O F T H E D E M A N D M O D E L

The 'economic' variables in our linear equations4 are QB,, QS,, QW,, denoting the quantity demanded (in gallons) of beer, spirits and wine respectively in the jth province; PB,, PS,, PW,

' For a discussion of the 'optional' taxation issue, see JOHNSON (1973). See also the address delivered by Mr Gerald LeBlanc, President of the Canadian Association of Provincial Liquor Commissioners, to the Conference of the National Alcoholic Beverage Control Association, San Juan, Puerto Rico, September, 1970. Other issues under discussion which affect alcoholic beverage consumption include the number of liquor outlets, hours of sale, and the type of advertising.

Demand studies frequently employ log-linear equations -see for instance, H O U T H A K K E R (1965). The restrictions of neo-classical static demand theory satisfy such functions only in an approximate sense, even when only the 'usual' economic variables are present, and as G O L D B E R G E R has noted (1967, pp. 101-4), the coefficients of the price variables do not lend themselves to direct interpretation as either 'Cournot elasticities' or as 'Slutsky compensated elasticities'. Nevertheless, judged by conventional statistical criteria, such functions often perform reasonably well. We have experimented with log-linear forms, and while the (short-run) own-price elasticities and income elasticities obtained from them conform to those presented here, cross-price effects are less plausible in sign and magnitude than those obtained with our linear model.

We also note that, in contradiction to neo-classical demand theory, our formulations are djaamic. While it is true that neo-classical restrictions have been incorporated into the formulation and estimation of dynamic demand functions recently (see, for example, P H L I P S (1972) for a dynamic form of the linear expenditure system model), these formulations entail the use of an 'income' variable such as total personal expenditures with each component 'explained' by a specific demand equation. It is not clear that for our purposes an expenditure systems approach would be helpful.

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Socio-econonric cleterrrtinnt~ts of the consru~~ption of nlco/tolic becerages 295

denoting the prices of these beverages (each deflated by the consumer price index, CPIj); Yj denoting personal disposable income (deflated by CPIj). The consumption and income variables are in per capi:a terms (where the deflator is the population age 15 and over).' 'Habit persistence' would appear to be an important aspect of the consumption of all three beverages, and thus lagged consumption is included as an explanatory variable. To capture the possibility of changes in tastes, we have used a time trend which provides a measure of the average annual growth rate in the dependent variable.

One problem in attempting to incorporate into time series analysis such variables as re!igious affiliation, ethnic group, and years of schooling is that these generally show very little variation over relatively short time spans. However, since sociological variables typically vary substantially among political jurisdictions, onc way to circumvent this problem is to pcol time series and cross-sectional data. Consequently, we have pooled data for the provinces to estimate demand relationships containing sociological variablzs.

Vectors of ethnic, religious, and educational (schooling) variables are denoted respectively by Ej, Rj, S j , and Dj denotes a column vector of 'province dummies'. In order to allow for the effects of several strikes in the industry, we have incorporated several additional dummy variables, denoted by ST.6

We selected the various sets of sociological variables on the grounds that these are frequently accorded importance in the psychological and sociological l i t e ra t~re .~ An arbitrary decision was made to include only those ethnic and religious groups whose membership accounted for 2 per cent or more of the population in 1961. Some combining of groups resulted in the eventual incorporation of seven ethnic, six religious, and three educational categories in the specification of the model. We also include Nj (the fraction of the 15-and-over population which is in the 25-54 age group) in order to test the hypothesisa that the 25-54 age group is a particularly important demographic determinant of alcoholic beverage consumption.

Since an overall intercept term is included, it was necessary to exclude one of the province dummy variables. We chose to delete the one representing Ontario and, consequently, the coefficients of the province dummies reflect differential effects cis d vis Ontario. Similarly, because the schooling categories are exhaustive, it was necessary to delete one, and we selected S1 (8 years and less). The resulting equation representing the demand for beer is given by Equation 1, where a,, . . . , a,, are row vectors of coefficients.

We selected 15-and-over as the deflator despite the fact that the legal drinking age was 21 for most of our sample period (it was lowered to 18 in the later years). In various studies this is the age category pertinent to alcohol consumption analysis. See, for example P O P H A M , S C H M I D T and D E L I N T (to be published).

These dummy variables are designed to take account of the effect of the strike on the demand for a particular alcoholic beverage (e.g. the effect of the 1958 Ontario beer strike upon the demand for beer in Ontario) and. in some instances, the effect upon demand in an adjacent province or upon the demand for other alcoholic beverages in the province where the strike occurred. ' See C A H A L A N et al. (1969, Ch. 2).

See C A H A L A N et (11. (1969, Ch. 2). Some support for this hypothesis is also given by the worksheets for the Urban Expenditure Survey supplied by Statistics Canada, 1969 S~rrcey of Family E.rpetrdilure itr Canada, Statistics Canada, 1972 (Catalogue No. 62-525).

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296 Jall~es A . Johltso~z and Er/test H. Oksnr~ert

TABLE I . Effects of specified cariables opott co~numptioti*

Variable

Regression coefficients Elasticity -

Lagged Dependent Relative price Income consumption Trend Relative price Income

variable PB PS PW y Q - I PB PS P W Y - -

Beer consumption - 1.526 -0.063 -0.073 0.276 0.408 0.253 -0.224 -0.1 12 -0.033 0,035

[3.0] [1.1] [0.6] [0.7] [5.9] [2.3] Spirits consumption -0.067 -0.040 0.037 0.138 0.431 0.047 -0.127 -0.910 0-210 0.227

[1.4] [6.9] [3.1] [3.6] [9-01 [4.4]

Wine consumption 0.070 0.003 -0.050 -0.003 0.614 0.034 0-231 0.135 -0.502 -0.008

[1.7] [0.7] [5.0] [O-I] [9.8] [3.8] - -

* The figures in parentheses are t-scores; the elasticities are calculated at the sample means.

A similar expression is specified f ~ r spirits and wine, with the 'B' subscript for quantity replaced throughout by 'S' and 'W' respectively. There are several ways to combine time series and cross-sectional data, but the covariance analysis framework appears well suited for our purpose^.^ Ordinary least squares (OLS) has been applied throughout. Each of the right-hand side variables in Equation 1 is treated as predetermined. This is clearly justifiable in the case of the non-economic variables, and it is justified in the case of the price variables by the fact that prices are, to a very significant degree, fixed by the policies of government control boards. Income is also treated as predetermined. In principle, there may be feedback from the consumption of alcol~olic beverages to disposable income, but given the relatively small contribution of the 'alcoholic beverages sector' to the provincial economies, this phenomenon would appear to be of negligible importance. Of course, it is possible that the other assumptions concerning a 'well-behaved' stochastic term (and justifying the use of OLS) will not be substantiated in the context of our model, and we report below on a test concerning one of the most important of these (namely, the assumption of a serially independent error term).

Examination of Table 1 shows that own-price invariably has the expected sign and is significant at the 1 per cent level in all cases. Income assumes the sign anticipated in the spirits equation and is significant at the 1 per cent level. It is not significant in either of the other equations (both t-scores are less than unity in absolute value), and in one of these, it assumes a negative value. Lagged consumption and the trend variable have signs which accord with our expectations, and are invariably highly significant. Three of the cross-price terms have the expected sign (positive) and two of them are significant at the 5 per cent level. Three of the cross-prices have the wrong sign, but none is significant at the 5 per cent level.

An alternative to covariance analysis conducted with OLS has been proposed in the context of at variance components model, by N E R L O V E (1971). See also the study by M A D D A L A (1971) concerning the application of covariance analysis in the variance components model.

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Socio-economic c/eter.mirranrs of the coiuurrrption of alcoholic becernges 297

Judged by the criteria of 'appropriate' signs and significant coefficients, the results in Table 1 are encouraging. Table 1 also presents elasticity estimates (evaluated at the sample means). The own-price elasticities are -0-224, -0.910 and -0.502 for beer, spirits and wine, respectively. The income elasticity is 0.227 for spirits and virtually zero for beer and wine.

We now briefly compare our findings with those from some other studies. NISKANEN'S

(1962, p. 36) analysis of United States time series data yielded three-stage least squares elasticity estimates of -2-0 and - 1.6 for spirits and wine respectively, and a comparatively low own-price elasticity of -0.5 for beer. The income elasticity, which was estimated at 1.5 and 0.6 for wine and spirits respectively, was found to be negative in the demand function for beer. HOUTHAKKER and TAYLOR (1970, p. 61) have recently formulated an interesting demand model which has considerable potential for the analysis of habit-persistence phenomena. However, in their analysis of the demand for alcoholic beverages, price variables were excluded and the data were not disaggregated by type of beverage [7, 611. SCHWEITZER

(1969, pp. 29-30) applied the Houthakker-Taylor model (with price variables included, and with a variable defined as the 20-and-over age group as a percentage of the total population) to Canadian data for total alcoholic beverage consumption. He obtained 'short-term' income and price elasticities of 0-88 and -0.19 respectively (and 'long-run' values of 0.94 and -0.21 respectively). Finally, we note that HOGARTY and ELZINGA (1972, p. 197), from pooled time series for the individual states of the United States, obtained price and income elasticities for beer of -0.9 and 0-4.

The estimates of 'long-run' own-price and income elasticities, where 'long-run' refers to a position of static equilibrium, may be of some interest. These values may be more pertinent, than are the short-run estimates, to comparisons with results obtained from the estimation of static demand functions (for instance, the studies by N I ~ K A N E N (1962) and HOGARTY and ELZINGA (1972) involve only static relationships). In any case, these elasticities are somewhat higher (in absolute value) than their short-run counterparts. Specifically, the own-price elasticities for beer, spirits, and wine are, respectively, -0.379, - 1.599, - 1.301, while the corresponding income elasticities are 0.060, 0.399, -0.022. The foregoing suggests that our estimates are generally consistent with those obtained elsewhere.

The remaining coefficients in the three estimated equations are presented in Table 2. The available literature concerning the effects of the variables shown here does not offer much guide as to 'correct' signs and, consequently, we do not focus on that issue." Instead, we concentrate upon the overall contribution of a specific group of variables to the variation in consumption. ' '

The province dummies are highly significant for all three equations. Ethnic group is highly significant in the beer and wine equations, but is not significant in the spirits equation. Religious affiliation is highly significant in all but the beer demand equation. Level of education is highly significant in the spirits demand equation but nowhere else. Thus, in 5 out of a potential 9 instances, the groups of sociological variables are significant in explaining

lo The results of variogs surveys which show that one or another group appears to consume more or less of some alcoholic beverage than another group cannot be used to infer 'expected' signs, for those studies do not attempt to control for such economic variables as prices and income. See, for example C A H A L A N et a/. (1969, Ch. 2).

For a discussion of the test procedure see, for example, J O H N S T O N (1972, pp. 146-51).

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consumption. The demographic variable (fraction of the population age 15 and over which is in the age group 25-54) is significant at the 5 per cent level only in the demand for spirits equation. The du~ilmy variables incorporated to make allowance for various strikes in the alcoholic beverages industry are invariably significant at the 5 per cent level.

We also note that the overall goodness of fit, measured by R 2 (the coefficient of detern~ina- tion adjusted for loss of degrees of freedom) is 0.9944, 0.9903, and 0-9910 in the delllalld equations for beer, spirits and wine respectively.

Of course, in this context, where time series and cross-sectional data have been pooled, it is not feasible to use conventional tests for the presence of autocorrelation (or even Durbin's large-sample test which was designed for models containing a lagged dependellt variable). Consequently, we have employed the non-parametric test used by GRILICHES et a/. (1962). Thus, we formed a 3 x 2 contingency table of the following type for each equatiol~. The 'dependent' variable is defined as the sign on the OLS residual in period t, while the 'independent' variable is the sign on the residual in period t- I, and the cell entries represent the number of residuals characterized by these variables. We applied a chi-square test and the results indicate that, for the beer and spirits equations, there is no reason to reject tile null hypothesis of the absence of first-order serial correlation between the residuals at the 5 per cent level of significance, but there is evidence of serial correlation in the demand for wine equation. Thus, in the case of two equations, there is no reason to view the goodness- of-fit measures (the standard errors associated with the regression coefficients and the coefficient of multiple determination) as being affected by the presence of autocorrelation, but the possibility of such a bias is present in the demand for wine equation.

111. S O M E T A X P O L I C Y I M P L I C A T I O N S

Price and income elasticities have implications for tax policy. If tax policy is directed towards reducing the consumption of alcohol, then it is relevant to note, from a comparison of the own-price elasticities for the three beverages (Table I), that a given increase in tax would have its greatest effect for spirits. Furthermore, once it is taken into account that alcohol content per gallon of beverage is highest for spirits, this statement is reinforced. This would suggest a differential emphasis upon taxation of spirits relative to beer and wine.

If the goal of alcoholic beverage tax policy is to maximize revenue, it appears that the tax rates on all three beverages should be increased. This can be demonstrated in a rough way, through an adaptation of GEARY'S (1973, p. 206) simple partial equilibrium model to our context. Thus, to assess the responsiveness of sales tax revenues to changes in tax rates, we specify the model shown by Equation 2

Here Q represents consumption of a specific alcoholic beverage, P represents own-price, and Z denotes 'all other variables'. The relationship between prices and ad t,alorem tax rates l 2 is given by P = (1 i t)Pm, where t denotes the average tax rate and P , denotes the manufacturer's price (assumed exogenous). Sales tax revenue (R) is given by R = t p , ~ .

' 2 The assumption of ad ralorem taxes simplifies the algebraic manipulations without detracting from the essence of the argument. Of course, in reality, some taxes are act calorettt while others arc per unit or annual.

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300 Junles A. Johr~sotl and Er~~es t H. Oksanetr

Substituting into Equation 2 and differentiating with respect to the tax rate we obtain, where E denotes the price elasticity of demand,

It is now simple to derive a necessary condition for the elasticity of tax revenue to be positive, by imposing the condition that the expression on the right-hand side be positive. This implies that the price elasticity of demand multiplied by the share of tax in the unit price to the consumer must be greater than - I, as shown in Equation 4.

The ratio of t l ( t+ 1) is approximately 0.3 for beer, 0.8 for spirits and 0.3 for wine. These ratios combined with the elasticity coefficients given in Table 1, show that for all beverages (with own-price elasticities of -0.224, -0.910, -0.502 respectively) Equation 4 holds. Consequently, tax revenue would be increased by a substantial increase in the average tax rates for beer and wine and a small increase for spirits. These conclusions hold in the long-run for beer and wine; but not for spirits.

The income elasticities of demand for all three beverages are substantially less than unity and, consequently, revenues from alcoholic beverages (at cQnstant tax rates) will lag behind growth in income. Moreover, should government expenditure grow at least as fast as income, then either alcoholic beverage tax rates must be raised or other sources of revenue utilized to prevent an imbalance in the growth of revenues as compared with expenditures.

IV . CONCLUSIONS

The consumption of alcoholic beverages is an important social issue. The formulation of public policy in regard to alcoholic beverage consumption requires reliable information concerning the nature of the demand for beer, spirits and wine. Because there is reason to expect that non-economic factors play a role in the consumption of alcoholic beverages we have specified and estimated dynamic demand equations for each of the three main categories of beverage, which incorporate a relatively large number of sociological variables. In general, our findings suggest that these variables, along with traditional economic ones, are significant determinants of the demand for alcoholic beverages. Moreover, our results concerning the effect of economic variables are generally consistent with those obtained in other studies.

Our findings also suggest that a case may be made for the differential taxation of certain beverages, but the direction of changes in taxes naturally depends upon the specific nature and purpose of social control measures. If the purpose of alcoholic beverage taxation is to control the consumption of alcohol, it appears that the greatest reduction in consumption, for a given tax increase, would occur for spirits and the smallest reduction, for beer. If alcoholic beverage taxes are levied to maximize revenue, the short-run coefficients indicate that taxes should be raised on all three beverages, but that the largest increase should take place for beer and the smallest for spirits.

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