Pubs are part of the British national culture. They are social meeting places, where people have a chat and solve the world’s problems, or at least discuss them. However it’s not hard to notice that the pub scene is changing. Not least because there are 5,800 fewer pubs around today than there were in 2008. On average eighteen pubs close every week - that’s just short of a thousand a year.

Economics can help explain these closures.

We are turning up to pubs in fewer numbers and buying less beer. Indeed the demand for pub beer has dropped by 4.8% in the past year. It’s a simple case of there being lower “derived demand’. There is less need for both pubs and bar staff. Two reasons can be put forward for this change.

1. Price changes.

Some blame has been firmly placed at the feet of government. A duty escalator, introduced in 2008, means beers are taxed at 2% above inflation every year. This means tax accounts for a third of the cost of every pint. CAMRA, a pressure group, claims taxes on beer have risen by 40% since the escalator was introduced. The tax is an extra expense to producers who pass on the costs in the form of price increases. The escalator means a shift and decrease in supply. If you raise prices in real terms then you can expect demand to fall. The sensitivity of demand to these price changes is dependent on the price elasticity of demand for beer sold in pubs.

Around 50% of pubs are tied to big brewers. There is an argument that these brewers are passing on costs to publicans who cannot survive. For some pubs this means closure because the brewery can sell the pub premises to be converted to another use. Big brewers and pub chains prefer to invest in city centre pubs rather than suburban or rural ones.

2. Shifts in the demand curve.

The demand curve has shifted to the left. We want to buy fewer pub pints than before at each and every price level. One cause is very likely to result from an income effect - many people in the UK have seen a significant decline in real income since 2009. It means they have less disposable income and an even lower amount available for discretionary spending. As with other normal goods, when income falls so will demand.

Pub beer prices have been going up at a rate higher than inflation and possibly the price of substitutes has not risen so sharply as beer. Assuming a close substitute for beer purchased in a pub is beer purchased from a supermarket, and then it is possible to assume that cheap supermarket beer is having an impact of beer consumption in pubs. Evidence, however, indicates that supermarket sales of beer have actually dropped by 6.5% over the past year, so that argument won’t stand.

A close substitute for beer might be wine which is seeing an increase in consumption, but perhaps it’s better to look at pub experience as the product rather than the drinks that people consume there. If we look at it from this angle, changes in tastes and fashions might be more influential. Maybe the growth in coffee bars has had an impact on pubs. We may now prefer to invite friends around for a meal and drink rather than go to a pub. The smoking ban in enclosed public places came into force in England in 2007 has had a positive health impact, but also added to the decline in popularity of pubs.

The effects of pub closures.

Pub closures are often a real loss to the local community. It also involves a change in land use. Pubs are sold off to be converted into private accommodation, supermarkets and even residential homes.

Supporters of the free market would say this is not a bad thing, because the bad pubs will close and the assets will be sold on to something that is in demand. However, pubs are part of our heritage, so is there another solution?

What can be done to save pubs?

• Community pubs which are divorced from the big brewers. Robert Plant and Peter Gabriel are amongst musicians that have joined a campaign to save Bath-based music venue pub “The Bell”. The campaign has worked with the council and now need to raise a further £200,000 to reach the valuation of the property. With large sums of money involved and community shareholders investment at risk, these community pubs will still need to be run on a commercial basis. Hattie Knight did a film about this.
• Micro breweries in the UK receive a tax incentive to help them compete with the big brewers. They might want to band together to buy pubs jointly and meet the local community needs.
• Tighten planning laws which allow pubs to be demolished or converted without the need for planning permission, but the reality is that use-category change regulations have been loosened.
• Change tax incentives. I went to a performance by the political comedian and activist, Mark Thomas, who asks the audience to suggest their own manifesto items and the audience vote to choose their priority. One audience chose to decrease the tax on beer sold in pubs, but at the same time increase the tax on beer sold in supermarkets. The idea would be to provide a disincentive for us to drink at home and an incentive to go to the pub. Interesting! It’s probably better to drink in a pub socially on occasions than at home, more often. It also has a greater impact on the local economy than a supermarket which already makes a profit anyway and won’t leave just because it sells less beer, wines and spirits.

Postscript.  On the 20 March 1013 the UK government scrapped the duty escalator on beer. A big thumbs up for the pressure group CAMRA and other lobbyists.