Corrective Consumption Taxation: Responses of the Alcohol Market
Rantanen, Sofia (2025)
2025
Kauppatieteiden maisteriohjelma - Master's Programme in Business Studies
Johtamisen ja talouden tiedekunta - Faculty of Management and Business
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Hyväksymispäivämäärä
2025-06-03
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tuni-202506026569
https://urn.fi/URN:NBN:fi:tuni-202506026569
Tiivistelmä
This thesis examines the market responses of Finland’s January 2024 alcohol excise tax reform. The research questions focus on examining the extent to which changes in taxation are reflected in consumer prices, as well as assessing how these price adjustments influence alcohol consumption in the short term. Additionally, the study covers relevant literature findings on market responses to alcohol taxes, and on justification of government interventions through alcohol taxation. The context of the study is Finland, a Northern European country, characterized by high alcohol taxes and prices, and significant government interventions.
The theory framework in the study is built on classical, neoclassical, and behavioral economics. Tax pass-through and price elasticity of demand are the most central theoretical concepts in the study, but also externalities, rational addiction theory, time-inconsistency, information asymmetry, and the Pigouvian and Ramsey optimal tax models are explored. As the main empirical method, the study utilizes a Difference-in-Differences model to estimate the effects of the tax reforms on prices and consumption.
The findings indicate moderate and heterogeneous price and consumption effects. The cut in beer taxes led to an approximate price reduction of 3.5%, while the tax hikes for wine and spirits resulted in prices increasing 2.9% and 5.4%, respectively. Tax pass-through analysis revealed under-shifting, with pass-through rates of approximately 71% for beer, 37% for wine, and 61% for spirits. Consumption responses also varied, with wine and spirits sales declining by 16.6% and 4.3% on average. Beer consumption increased by 5.9%, driven by the most popular beer sub-category.
Robustness checks indicate caution in interpreting the empirical findings causally, highlighting concerns regarding parallel trends and potential substitution behaviors. Nonetheless, the study provides new evidence for the effects of alcohol taxes in Finland, contributing to the broader sin tax literature. Furthermore, the findings presented have relevance especially for Finnish policymakers.
The theory framework in the study is built on classical, neoclassical, and behavioral economics. Tax pass-through and price elasticity of demand are the most central theoretical concepts in the study, but also externalities, rational addiction theory, time-inconsistency, information asymmetry, and the Pigouvian and Ramsey optimal tax models are explored. As the main empirical method, the study utilizes a Difference-in-Differences model to estimate the effects of the tax reforms on prices and consumption.
The findings indicate moderate and heterogeneous price and consumption effects. The cut in beer taxes led to an approximate price reduction of 3.5%, while the tax hikes for wine and spirits resulted in prices increasing 2.9% and 5.4%, respectively. Tax pass-through analysis revealed under-shifting, with pass-through rates of approximately 71% for beer, 37% for wine, and 61% for spirits. Consumption responses also varied, with wine and spirits sales declining by 16.6% and 4.3% on average. Beer consumption increased by 5.9%, driven by the most popular beer sub-category.
Robustness checks indicate caution in interpreting the empirical findings causally, highlighting concerns regarding parallel trends and potential substitution behaviors. Nonetheless, the study provides new evidence for the effects of alcohol taxes in Finland, contributing to the broader sin tax literature. Furthermore, the findings presented have relevance especially for Finnish policymakers.