Is the Demand for Alcoholic Beverages in Developing Countries Sensitive to Price? Evidence from China

Abstract

Economic literature in developed countries suggests that demand for alcoholic beverages is sensitive to price, with an estimated price elasticity ranging from -0.38 for beer and -0.7 for liquor. However, few studies have been conducted in developing countries. We employ a large individual-level dataset in China to estimate the effects of price on alcohol demand. Using the data from China Health and Nutrition Survey for the years 1993, 1997, 2000, 2004 and 2006, we estimate two-part models of alcohol demand. Results show the price elasticity is virtually zero for beer and only -0.12 for liquor, which is far smaller than those derived from developed countries. Separate regressions by gender reveals the results are mainly driven by men. The central implication of this study is, while alcohol tax increases can raise government revenue, it alone is not an effective policy to reduce alcohol related problems in China.