The Economics of Alcohol Policy

How taxes, licensing and prohibition affect drinking and its harms, with lessons from India's state-level prohibition experiments.

Alcohol causes significant harm: the World Health Organization estimates that around 2.6 million deaths a year are attributable to alcohol. Harms include liver disease, cancers, road accidents, violence and harm to families.

The economic case for policy

Alcohol creates externalities: drunk driving harms others, and alcohol-related violence and family breakdown affect people beyond the drinker. Health care and policing costs fall on society.

Policy tools

Taxes: higher alcohol prices reduce consumption, especially among young and heavy drinkers.
Minimum unit pricing: Scotland introduced a minimum price per unit of alcohol in 2018. Research found it was associated with reduced alcohol sales and alcohol-related deaths.
Limiting availability: restricting licences, opening hours and sales locations.
Drink-driving laws and enforcement.
Advertising restrictions.

Alcohol in India

In India, alcohol is a state subject, and excise taxes on alcohol are one of the largest sources of revenue for many state governments. This creates a tension: states benefit from alcohol revenue while facing its health and social costs.

Prohibition experiments

Several Indian states have banned alcohol at different times, including Gujarat, which has had prohibition since 1960, Bihar since 2016, and others that later lifted bans. Research on Bihar’s prohibition has found some reductions in drinking and in certain crimes and domestic violence, alongside problems such as illicit liquor, deaths from toxic homemade alcohol, large numbers of arrests and lost state revenue.

The prohibition trade-off

As with drug prohibition, banning alcohol can reduce consumption but create black markets, illegal and sometimes dangerous alcohol, corruption and enforcement costs. Many economists favour taxes and regulation over outright bans.

The toxic brew

When alcohol is banned, some people buy illegally made liquor, which may contain methanol, a toxic substance. Tragedies from spurious liquor, killing dozens of people at a time, have occurred in several Indian states. Black markets can make a product more dangerous, not just harder to obtain.

Thinking prohibition simply stops drinking

Prohibition can reduce drinking, but it also creates illegal markets, dangerous substitutes and enforcement costs. Its overall effects depend on how it is implemented and enforced.

Key takeaways

Around 2.6 million deaths a year are attributable to alcohol, the WHO estimates.
Alcohol creates externalities like drunk driving and violence.
Taxes, minimum pricing, availability limits and drink-driving laws reduce harm.
Indian states depend on alcohol revenue, and prohibition in states like Bihar has had mixed effects.