A competitive market for a particular alcohol product or the aggregate product category alcohol
is shown in Figure 1. The demand curve D represents the marginal private benefits (MPB) of
the alcohol product to consumers. It represents consumer valuation of the social, recreational,
taste and other sensations gained, and it deducts any private costs of alcohol consumption.
Well-informed and far-sighted rational individuals take into consideration not just current period
benefits and costs to them, but also any longer-term costs associated with alcohol consumption,
including risks to future health and employability. This forward-looking, decision-making framework
is an example of Becker and Murphy’s (1988) model of rational addiction.
There is considerable econometric evidence that the quantity of individual alcoholic beverages,
and for alcohol as an aggregate, is negatively affected by price changes (Fogarty, 2008). Most estimates
are in the inelastic zone.
The supply curve in a competitive market represents the marginal private cost (MPC) of producing
the product, including the opportunity cost of labour, capital, materials, land, water and
other natural resources. In the context of the production of alcohol, rather than a competitive
model, the wine industry likely is better described as a monopolistic competition with many producers
of differentiated products and low costs of entry and exit. The structure of the beer and
potable spirits industries can be described as a differentiated oligopoly with a few producers and
high costs of entry and exit. With these industry structures, the industry supply curve for alcohol
will be above the MPC. The reality that alcoholic beverages are mature products, there is high
substitutability between the different brands and there is intense scrutiny of the industry by the
ACCC against monopolistic behaviour means that opportunities for monopolistic pricing are
highly constrained. Then, in practice, the difference between the market supply curve and an
MPC curve is likely not large, both absolutely and relative to the same comparison for other
industries in the economy.
If we make further assumptions that the demand or MPB curve also corresponds to the marginal
social benefit (MSB) curve and the supply or MPC curve corresponds to the marginal social cost
(MSC) curve, the market equilibrium depicted in Figure 1 corresponds also to the most efficient
level of consumption of alcohol from a society perspective.