Mathmatics case study

Drinking to good health: A tax on Thailand’s alcohol Man Isha Kaur, Keith Newman, Lee Fawcett, Newcastle University

G overnment taxes are applied to many things we buy. In some cases, these taxes are deliberately placed on unhealthy items from chocolate biscuits to cigarettes – not just to raise revenues for the government but also to discour-

age the public from their unhealthy habits. We analyse the Thai government’s decision to put a tax on alcohol.

According to the UN’s Food & Agriculture Or- ganisation (FAO), Thailand ranks fifth world- wide in the consumption of alcohol, well above many European countries such as Ireland, Por- tugal and France. Well-known for making Snake Whiskey and other reptile-infused liquor, research conducted by the FAO indicates that Thai people generally prefer spirits to other types of alcohol and often consume large quan- tities of alcohol in a single sitting.

Figure 1: Snakes and other reptiles are often infused into liquor in Thailand.

In 2013, the Thai Centre for Alcohol Studies claimed that the average Thai citizen (aged 15 years or over) consumed 7.1 litres of pure alcohol1 per year, bringing national annual con- sumption of pure alcohol to a staggering 378 million litres. The Thai government imposes a heavy duty on alcohol. Taxes for 2014 have increased the average price of pure alcohol by 60% to about 2,500 Baht per litre (the Baht is the Thai unit of currency). A decrease of 1.5% in the annual consumption of pure alcohol is forecast in Thailand for the year 2014, as a direct result of this price-hike.

Conventionally, the demand curve of a product represents how price varies with consumption. In accounting and finance, linear functions are often used for demand curves. If the gradient of the demand curve is less than −1, the product’s demand is said to be inelastic. If a product has an inelastic demand, the quantity of that product sold does not decrease significantly as the price increases. This is often the case with popular products - products that people will continue to purchase even if they become more expensive. Alcohol is one such product; hence the Thai government can be assured of earn- ing high tax revenue when imposing taxes on alcoholic beverages.

1In the UK, 1 unit of an alcoholic beverage consists of 10 grams of pure alcohol - which is around 12.7 ml.

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Figure 2: Singha is a beer producer in Thai- land. Their beer is sold worldwide, including in UK supermarkets.

Singha, a local Thai beer company, obviously have an interest in the demand curve for al- cohol consumption in Thailand. Their own research has revealed that the price of pure alcohol decreases by 270 Baht for every one million litre increase in consumption; they also claim that, if annual consumption dropped to just 200 million litres of pure alcohol, the cost per litre would need to be as high as 46,300 Baht.

Campaigns such as Thai Health Promotion Foundation (THPF) support the new alcohol tax rates, believing that the increased price of alcoholic drinks will benefit the public by reduc- ing the number of drinkers - especially amongst the youth. Overall, THPF recommend a re- duction of at least 20% in annual national con- sumption for the year 2015. The subsequent health campaigns encourage the government to extend taxes to the large amount of home-made alcohol brewed and sold. However, tax laws on national produce do not get passed as easily as those on imported goods. Hence, in an ef- fort to reduce the country’s high consumption of the strong, home-made liquor, in 2015 the government plans to introduce a floor price of 7,000 Baht per litre - the minimum price pure alcohol could be sold for.

Things to think about

• Can you find the equation of a demand curve for alcohol consumption in Thailand?

• Can you visually represent this model to make it easier to understand?

• Think about the claim that the demand for alcohol is inelastic.

• What do you think is meant by a “ceiling price” for alcohol?

• Do you think your linear demand function is realistic? If not, why?

• Compare and contrast the demand curve you found earlier to that suggested by Singha’s own research.

• Do you think the Thai government’s plans for alcohol pricing in 2015 will help achieve the THPF’s recommendations? Do you think similar plans should be considered for alcohol pricing in the U.K.?

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