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Wednesday, April 15, 2009

What is the price elasticity of beer?

At least in Oregon?

Co-author Dennis W. points me to a story concerning a proposed increase in beer taxes in Oregon from a current $52.21 from $2.60 per barrel to $52.21 per barrel. I love the odd number of $52.21, how did the legislature come up with that figure?

Regardless, the upshot is that the tax would raise the price of a pint of beer by $1.25 to $1.50. Assume that the average pint sells for $4 (if there is a reader from Oregon, perhaps we can get a firmer figure?). The tax would raise the price of beer by between 31.25% and 37.5%.

The economics literature is full of studies estimating the price elasticity of beer. A somewhat famous paper (although a bit dated) by Hogarty and Elzinga in the Review of Economics and Statistics (1972) estimates that the demand elasticity for beer nation-wide was estimated to be between -0.88 and -1.13. Other studies of the period found somewhat similar ranges.

Economic theory suggests that more efficient taxes are levied on products with lower demand elasticities, although in principle I tend to rail against sin taxes as a "tyranny of the majority." Nevertheless, assuming the demand for beer in Oregon is somewhat similar to the demand for beer nationwide from the 1970s then the increase in the price of beer would lead to an approximately 25% decline in the consumption of beer.

If this is the case then the revenue raised by the tax will be considerably less than the state legislature anticipates.

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Any thoughts on where I could find more recent studies? Thanks and nice work.
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