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Good Intentions, Impractical Policy

Bihar's Alcohol Ban

Nitish Kumar's decision to ban alcohol in Bihar may not address the problem of domestic violence, as he expects it will. The state will also lose Rs 4,000 crore in tax revenue. Moreover, bans have always led to black market sales, and then greater expenditure to enforce the ban. The answer to growing alcoholism and its related social malaise lies in higher taxes and limitations on access to alcohol.

The announcement by Bihar Chief Minister Nitish Kumar that the state will implement prohibition on alcohol from 1 April 2016 is a classic case of tail chasing. This is the one area where economists can make a good prediction—a blanket ban on a preferred substance like alcohol gives rise to a black market, underground production activities, price rise and a diversion of scarce law enforcement machinery for activities that the state and the market can easily work together to limit.

And there does exist a simple policy. To begin with, an increase in the price of alcohol—both through higher taxes and by making it harder to access—might go a long way in curtailing the demand for alcohol, and then the state can use the surplus to change the demand elasticities of alcohol.

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