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The Economist's Way of Thinking About Alcohol Policy'

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DOI: 10.22459/AG.15.02.2008.06

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The Economist’s Way of Thinking
About Alcohol Policy
Harry Clarke1

Abstract
This paper assesses policy interventions in alcoholic drink markets from an economic
perspective. This perspective assumes that alcohol yields consumption benefits as
well as costs, and that society’s utilitarian objective is to maximise the excess of
alcohol’s benefits over its costs. The economic perspective rejects the common
community focus on the ‘gross cost of illness’ consequential to alcohol consumption.
The economic approach to alcohol policy instead emphasises information, self-control
and the external costs of consuming alcohol. For consumers with alcohol dependencies,
a policy mix emphasising the role of cues and self-control is suggested.

Introduction
Australian adults drank on average 9.8 litres of ‘drinking alcohol’ (ethanol) per
capita in 2004–05. Some 13.4 per cent drank at ‘risky’ levels, this percentage
having grown 50 per cent over the previous 10 years (ABS 2006).2 Some drinkers
spent substantial resources controlling their drinking: 37 per cent of clients
seeking treatment for drug dependency saw alcohol as the primary drug of
concern (AIHW 2006). Finally, alcohol is (after tobacco) the second-largest cause
of drug-related hospital admissions and the main cause of deaths on roads (ABS
2006).
This paper examines policy interventions in alcoholic-drink markets from
an economic perspective. This approach rejects the paternalism which opposes
drinking alcohol because of claimed high gross costs. Instead, it assumes that
alcohol yields consumption benefits (in taste and effects) as well as costs, and
that society’s utilitarian objective is to maximise the excess of its benefits over
its costs.
Consuming alcohol, then, is viewed for the most part, as a social, recreational
activity — a social lubricant that enhances the enjoyment of life. For most, using
alcohol is an informed, rational choice with relatively harmless implications —
a perspective not typically adopted by medical and public-health researchers.

1 The Department of Economics and Finance, La Trobe University, h.clarke@latrobe.edu.au.

2 For males, consumption of up to 28 standard drinks per week was ‘Low risk’, 29–42 per week ‘Risky’,
and 43 or more ‘High risk’. For females, consumption of up to 14 standard drinks was ‘Low risk’, 15–28
per week ‘Risky’, and 29 or more ‘High risk’. A standard drink contains 10 grams of alcohol, so the
average male drinks 980 standard drinks per year or 19 per week.

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 Agenda, Volume 15, Number 2, 2008

The analysis recognises, however, that alcohol consumption has important

costs, particularly when consumed at high levels or in risky settings.
Consumption can have harmful physical and mental health effects and can lead
to anti-social, dangerous behaviour such as drink-driving and violence,
particularly within the family. These costs become important to an economic
liberal when they are not borne by individual consumers or when there are
issues of information failure or failure of self-control.
But from an economics perspective even substantial harm caused by alcohol
consumption does not, by itself, suggest alcohol use should be restricted. The
presumption is that usually individuals are the best judges of their own welfare.
Thus, provided the potential for harm is recognised by users, and harms are
borne by users who assess them rationally by comparing benefits to costs at the
margin, restrictions are redundant. The presumption is that alcohol consumption
provides net benefits to most adults who make informed individual choices.
This paper provides a framework that can assess the government policies
have been devised to regulate the terms under which alcohol is consumed.
Medical and non-economic approaches are examined and then reasons for
intervention provided. Information, self-control and externality-based policies
are discussed, before final remarks are made.

Medical and non-economic approaches

Much community focus on alcohol consumption looks at adverse health and
neuropsychiatric consequences. This ‘gross cost of illness’ approach to estimating
the consequences of consumption (Godfrey 2004) focuses on the health costs of
excessive drinking, whether this occurs regularly or episodically, and with
related dependence issues. There is concern with social problems associated with
drinking, in the workplace and home, with crime, intentional cause of injury
and with drinking on inappropriate occasions such as prior to driving. Particular
attention is directed to youth drinking (RACP 2005; WHO 2004).
This emphasis helps identify health and other cost implications of alcohol
consumption but does not help much in designing policy. To what extent should
consumption be restricted? What are the costs, in terms of foregone benefits, of
restricting consumption?
That drinking alcohol can be risky does not, in itself, imply much about its
desirability or the extent to which it should be restricted. The question is how
to value associated costs and benefits. Economics does this by assigning monetary
values to individual choices and to any consequent costs or benefits that spill
over as externalities. Policy then seeks interventions which maximise the
difference between social benefits and costs.
Drinkers maximise this difference themselves by making informed choices,
provided there are no external costs or benefits. They then both maximise
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 The Economist’s Way of Thinking About Alcohol Policy

individual and the social advantage. With external costs, however, free markets
will not achieve this. A restriction to reduce consumption to the point where
net social benefits are maximised then makes sense provided the cost of the
restriction is less than the net benefits lost by not employing it, establishing a
case for policy activism.
If consumers are aware of risks and costs of activities (whether drinking
alcohol, smoking cigarettes, driving a car or bungy-jumping) there is no a priori
case for policy restrictions without external costs. Focusing on minimising gross
health costs alone suggests extreme, prohibitive policies.
The hypothesis that people make consumption choices rationally, using sound
information, can be questioned given the scale of alcohol-abuse issues. Numerous
people have self-control problems with respect to alcohol. Others fail to identify
harmful consequences of consumption. This provides arguments for better
information and for improving decision-making skills.

Rationales for intervention

There are three market imperfections that create a case for restricting alcohol
consumption, and a fourth, realpolitik, reason: paternalism.
1. Information: Efficiency in market exchange requires that the purchaser
of a product understands its characteristics. With respect to alcohol, an issue is
whether consumers understand that alcohol is a neurotoxin that destroys brain
cells, with few health benefits (Fillmore et al. 2006). It is also unclear whether
consumers understand the genetic and neurobiological bases for alcohol
self-control problems.
The information difficulties are compounded by private-sector advertising
and alcohol promotion which links consumption to sporting and social prowess.
There is evidence that such advertising has significant consumption effects,
particularly among adolescents, where motivations for risk-taking,
novelty-seeking and peer-driven behaviour increase the probability of alcohol
experimentation (Saffer and Dave 2003).3
Finally, particular age, ethnic and socio-economic groups have poor
information. The failure to provide information about the negative consequences
of drinking alcohol is a market failure since information is a public good. Markets
will develop to promote alcohol consumption since this benefits commercial
interest, but there are diminished private incentives to provide information
presenting possible negative outcomes.
On the other hand, there is evidence that some young people overestimate
risks associated with alcohol consumption — particularly risks of becoming

3 The effects on adult behaviour are less clear (Nelson 2003).

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 Agenda, Volume 15, Number 2, 2008

alcoholic. This overestimation leads to less drinking than would occur were risks
accurately perceived (Lundborg and Lindgren 2002). The same type of finding
has been observed with respect to smoking, where most overestimate risks of
adverse health consequences (Viscusi 2002). To the extent that this is true,
public-information campaigns that seek accurate perceptions of health costs
should, paradoxically, be oriented towards calming fears of risks rather than
heightening awareness of them.
2. Self-control issues: Alcohol consumption can be addictive and people
may have problems controlling their consumption. Alcoholism is a chronic,
relapsing disorder characterised by a preoccupation with obtaining alcohol and
a loss of control over consumption. Self-control problems can be triggered by
impulsiveness that is, in turn, generated by advertising and other cues. There
are particular issues of self-control among youth, who have high impulsiveness,
as well as among those with particular genetic predispositions (Goldstein 2001).
3. Externalities: Alcohol consumption creates private costs for individuals
and social costs for those who interact with alcohol consumers and the broader
community. Drink-driving is the most serious cause of traffic accidents (Phelps
1997), with 28.5 per cent of road deaths of those aged under 65 attributed to
alcohol (ABS 2006). Violent behaviour by intoxicated persons is also a serious
issue.
Other alcohol-linked externalities include foetal alcohol syndrome and harms
caused by drinkers to family members. Some economists ignore intra-family
costs on the basis that family units are regarded as making mutual consumption
decisions. This is not so with most alcohol consumption, so family costs are best
regarded as a third-party impact.
In addition, since Australia has a publicly funded national health scheme the
medical costs of alcohol consumption are not only private. Above-average medical
costs will be met partly from the public purse, providing a public-interest case
for restrictions.
4. Paternalism: Although not a market-failure reason for intervention, there
are moral and emotional arguments against excessive alcohol consumption. Some
‘wowsers’ oppose alcohol consumption even if well-informed consumers, without
self-control problems, bear all consumption costs.
Paternalism should result in alcohol taxes being set above
externality-correcting levels. It motivates public-health campaigns to decrease
consumption not because external costs are generated but because reduced
consumption is the social objective.
For policy purposes, paternalistic arguments are unhelpful because they do
not take one far in developing a rationale for policy. Alcohol consumption is
opposed because certain groups in the community — doctors, scientists, religious

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 The Economist’s Way of Thinking About Alcohol Policy

leaders — assess it to be undesirable. However, considering paternalism as a

policy motivation is useful for understanding actual government policies which
can be assessed, independently of externalities, purely in terms of how well they
restrict consumption.

Policy Interventions
Market-failure reasons for policy intervention suggest various policy options.
1. Information-related policies: The public sector may need to intervene
to provide information about negative consequences of consuming alcohol and
to restrict advertising that falsely presents optimistic consequences of
consumption.
Accurate information on negative aspects of consumption includes information
on self-control issues and on genetic information that might suggest future
dependency problems. Goldstein (2001: 113) argues that ‘…children of alcoholics
should be advised to never touch alcohol; certainly they should be taught the
special hazards that alcohol holds for them — hazards not shared by their peers’.
A difficulty stems from disagreement over precise health consequences of
consuming alcohol among those without genetic predispositions to alcoholism.
The debate over possible health benefits from reducing heart disease is an
instance. Health benefits claimed to arise from consuming alcohol appear to be
a spurious consequence of including among non-drinkers those who have ceased
drinking because of poor health (Fillmore 2006). Apart from providing known
information there is a case for investing in improved information.
As mentioned, the case for health-risk warnings is weakened if people already
exaggerate risks. If particular at-risk groups or particular health concerns arise,
these should be targeted rather than providing general health warnings to groups
who, on average, assess risks adequately. Information targeting youth should
address risks of consumption, while information targeting problem drinkers
needs to address risks, problem-recognition, denial and dependency treatment.
2. Self-control policies: Problem drinkers are a sizeable sub-population
whose excessive drinking is hazardous to health.
For many heavy drinkers, alcohol is not an ordinary consumer good whose
consumption can be analysed using static, rational choice models. People become
addicted to alcohol in an unconscious process that eventually takes over their
lives. Unless consumers set out initially to become dependent, such heavy
drinkers are not ‘rational addicts’ (Becker and Murphy 1988). Heavy drinkers
typically start drinking as adolescents when excessive consumption is linked to
incomplete development of brain regions involved with executive control and
motivation. The vulnerability to alcoholism is greatest among individuals who
start consuming early in life but those with difficulties making rational choices

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 Agenda, Volume 15, Number 2, 2008

at any age tend to be alcohol abusers. Abusers have a higher incidence of mental
disorders (depression, anxiety, ADHD and schizophrenia) than the general
population and apparently use alcohol and other drugs to self-medicate (Koob
and Moal 2006).
Genetic influences on propensities to consume alcohol may underlie
personality traits such as impulsivity, risk-taking and stress responsivity that
drive excessive consumption. Family and twin epidemiological studies suggest
heritability of vulnerability to addictive diseases of 30–60 per cent (Kreek et al.
2005).
Like other addictive drugs (opioids, stimulants, nicotine, marijuana) and
natural rewards (food, sex, water) alcohol produces euphoria by activating
pleasure centres in the brain. Like other drugs, alcohol releases dopamine in the
brain where pleasure centres that have evolved to ensure survival get ‘hijacked’.
The euphoria induced by alcohol, particularly if enhanced by a genetic
predisposition, encourages repeated use. Over time, alcohol disrupts brain reward
circuits and can produce withdrawal and craving if consumption ceases. Such
negative reinforcements alternate with positive reinforcement to drive a cycle
of addiction that becomes etched into brain structures. This etching reinforces
pursuit of alcohol consumption, as a surrogate for survival-related behaviour,
by dominating attention and decision-making.
Problem drinkers come to drink too much and face difficulties limiting
consumption during particular episodes, with the first drink leading to
uncontrolled drinking. Moreover, these compulsions can be long-term.
Environmental cues associated with alcohol (people, places, advertisements) can
trigger intense cravings among those addicted which cause relapse into use even
after protracted abstinence.
Consumers in this cue-driven environment make consumption decisions with
limited rationality and foresight. Policies for improving self-control include
helping to demonstrate that alcoholism can be a consequence of recurrent
drinking and desensitising and limiting exposure to cues. There can also be
attempts to improve self-control by promoting ‘personal rules’ or heuristics to
control behaviour. Since problems with alcohol consumption primarily stem
from excessive consumption, ‘personal rules’ relating to the number of ‘standard
drinks’ consumed per week, numbers of alcohol-free days or, in some cases,
pursuit of total abstinence are useful information policies.
Self-control can also be improved by supply restrictions such as limiting the
availability of alcohol outlets, trading hours and promotion of advertising that
might trigger cues to drink. Unfortunately, such policies increase ‘user costs’ of
consumption that impact on all consumers.

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 The Economist’s Way of Thinking About Alcohol Policy

Supply-control measures on alcohol outlets and on opening hours will limit

external costs of alcohol consumption (Donnelly et al. 2006) and, by limiting
cues, promote individual abilities to control drinking. By keeping away from
cues and knowing that, beyond a certain time, drinking is impossible, people
with self-control problems can be helped to formulate personal rules which limit
drinking.
Restrictions on advertising help curb drinking among abstaining problem
drinkers subject to cues. Indeed, as with smoking, there is a case for limiting
cues in the media that elicit consumption.
For age and ethnic groups prone to excessive consumption because of
self-control problems, there can be a case for consumption bans. Minimum-age
laws and restrictions of alcohol availability to particular ethnicities, such as
Australian aborigines, are controversial policies. Anderson and Wild (2007),
however, supported such interventions resulting in the Northern Territory
Emergency Response by the Howard Government in 2007. Aboriginal people
are often alcohol-abstinent; but, those who do drink, often consume more than
13 standard drinks per episode (ABS 1994) and are therefore an ‘at-risk’ group.
With respect to drink-driving issues, the installation of ignition interlock
devices can improve the judgment and self-control of drinkers in their ability
to safely drive after consuming alcohol (ICADTS 2002).
Finally, treatment options emerge as a way of addressing excessive use. A
substantial literature shows that local GPs can be effective in providing early
interventions to caution people concerning alcohol problems (Johansson 2002).
Promoting a variety of behavioural and cognitive therapies makes sense, as do
traditional routes to control such as Alcoholics Anonymous. Given the social
costs of alcoholism, there is a case for subsidising such services on the basis of
their cost-effectiveness.
For problem drinkers, treatment options include pharmacotherapies using
drugs such as naltrexone (Volpicelli et al. 1992). Naltrexone reduces recurrent
daily drinking, diminishes alcohol-induced cravings and even reduces cravings
after a ‘priming’ drink. It therefore limits the tendencies to lose control. The
drug acomprosate suppresses cravings and relapse problems and can be used
with naltrexone (Rösner 2008). With external costs, there is again a case for
subsidising pharmacotherapies.
3. Externality policies: Economists focus on externalities as the primary
source of social costs in relation to substance abuse. The standard prescription
is to levy a tax internalising the external costs.
Externalities such as drink-driving-induced accidents cannot be dealt with
by a consumption tax since this externality stems from the combined activities
of drinking and driving. Moreover, the probability of an accident, given a certain

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 Agenda, Volume 15, Number 2, 2008

level of alcohol consumption, falls with age (Phelps 1997: 516). A driver aged
20+ who has consumed six standard drinks and then drives has 12-times the
chance of a fatal crash than a similarly-aged sober driver. For a driver aged
16–19, the risk increases to 100-times that of a similarly-aged driver. Inevitably,
highway patrols and booze buses must detect drink-driving, with the driver
then being penalised, rather than employing taxes on consumption. It makes
sense to impose stringent restrictions on alcohol consumption by young drivers.
It is only if certain alcohol-related externalities are related to overall
population alcohol consumption — the ‘population health’ view (Young 1998)
— that simple uniform tax policies make sense.
In Figure 1 the market demand for alcohol (q litres) is illustrated with the
marginal production cost c(q). The area under the demand curve measures private
benefits from drinking. Social marginal costs of consumption are also illustrated.
These comprise the private marginal costs borne by consumers and the external
social costs generated, including health and traffic accident costs borne by the
community as well as dollar costs of violence and anti-social behaviour to others.
As drawn, there are no external benefits associated with alcohol consumption
at low consumption levels and external marginal costs are low. As market
consumption increases, external costs rise at an increasing rate. Without taxes,
consumers operate where private marginal benefits equal private marginal costs
— they consume q2 and pay price p2. Because social costs exceed marginal
benefits over the range q1 to q2, this consumption imposes net social costs or
deadweight losses (DWLs) equal to area ABC.4
The standard economic prescription to remove these costs is to levy a Pigovian
tax t which, assuming competition, raises the alcohol price to p1, leaving
consumption where marginal private benefits equal marginal social costs at q1.
Determining this tax requires assessing the scale of the unpaid-for social
costs, how these are linked to consumption and the elasticity of demand for
alcohol. The more responsive demand is, the smaller the tax can be. Selvanathan
et al. (2004) provide elasticity estimates of –0.3, –0.4 and –1.3 for Australian
beer, wine and spirit consumption, respectively. For alcoholic beverages as a
whole, the estimated elasticity is –0.6, suggesting that a 10 per cent tax induces
6 per cent less consumption.5
If social costs are related to the alcohol content of drinks, this tax should
reflect this by being a volumetric tax related to the alcohol content of particular

4 Firms will produce where price equals marginal cost if they are competitive. With monopoly power,
price exceeds costs, creating deadweight losses but reducing external costs perhaps significantly (Nelson
2003).
5 A distinction is drawn between short- and long-run elasticities. The latter account for effects of current
consumption on future behaviour. One issue is whether forward-looking behaviour is rational. Baltagi
(2007) surveys recent literature.

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 The Economist’s Way of Thinking About Alcohol Policy

types of alcoholic beverages, not an ad valorem excise levied on the value of the
product sold. Alcohol products in Australia are taxed approximately
volumetrically, although spirits are subject to twice the charge on alcohol content
than beer, and wine is subject to ad valorem duty (Commonwealth of Australia
2005: chapter 5). In 2004–05, $5.1 billion was collected as excise and customs
duty (AIHW 2007). For years where comparable data is available, these revenues
greatly exceed gross health and even costs attributable to traffic accidents (Collins
& Lapsley 2002: 62–65).
Figure 1: External costs of alcohol consumption

This economic approach to taxation does not focus on the gross costs of
consumption, GC — the total medical and other costs attributable to alcohol. In
the figure, these are the area 0q2BE. Nor does it focus on non-internalised net
costs less benefits (NC) of alcohol — the medical and other costs not borne by
alcohol consumers less consumption benefits, given by area ECB. Instead, the
economic approach recognises that alcohol consumption yields benefits to
consumers, given by the area under the demand curve. Thus a tax-inclusive
price is sought that maximises the net social advantage — benefits derived less
all costs, whether internalised or not.
Indeed DWLs << NC << GC where << means ‘is much less than’. Thus
setting tax t eliminates society’s deadweight losses and reduces, but does not
eliminate, net and gross costs of consumption.

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 Agenda, Volume 15, Number 2, 2008

Note that optimal tax revenues, tq1, exceed non-internalised social costs EAF
because social marginal costs increase strongly as consumption levels increase.
Therefore, evidence showing that alcohol consumers pay more taxes than are
imposed in external costs does not support the conclusion that taxes are ‘too
high’ as claimed by, for example, Heien (1995) using ‘reparationist logic’. It is
only if non-internalised, marginal external costs were constant, so private and
social marginal cost curves are parallel, that tax revenues should coincide with
unpaid external costs to achieve social optimality. But social damages are, most
plausibly, strongly increasing in alcohol consumption. Thus taxes ideally should
exceed damages, rather than merely compensating society for damages done.
Empirically the social costs of alcohol consumption must be computed net of
external benefits. People who die from alcohol consumption create a social benefit
in terms of reduced costs of aged care and reduced costs of treating other diseases
that would have impacted on mortality if alcohol consumption was curtailed. If
there are external benefits from alcohol’s ability to catalyse social interactions
which help create social capital, these too should be netted out.
There are several reservations concerning this standard tax prescription.
(i) The approach optimises the overall social advantage but has distinct effects
on different community groups. Taxes levied are inevitably uniform — they do
not vary by consumer. If a minority of alcohol consumers has very inelastic
demands because of self-control issues then their consumption would need to
be constrained by high taxes if it is to be curtailed. Such taxes would impose
heavy DWLs on those consuming at moderate levels, who impose low social
costs. Some 74 per cent of Australians aged 14 years and above consumed alcohol
in quantities considered ‘low risk’ to health but paid hefty alcohol taxes (AIHW
2005). Setting lower taxes, however, to cater for those imposing low social costs,
leaves the behaviour of those with inelastic demands who impose large social
costs largely unchanged while significantly reducing their real incomes. If heavy
consumers have low incomes, this raises equity issues. While gainers from
efficient taxes can, in principle, compensate losers, this compensation is difficult
to engineer in practice.
Such distributional issues constrain policy. Indeed, some argue that ‘a tax
on alcohol would reduce consumption indiscriminately…and therefore reduce
the satisfaction experienced by millions of sensible drinkers without necessarily
reducing the harm caused by a few excessive drinkers’ (Littlefield 1986: 274).
High taxes may encourage the decision to quit entirely but, given an
alcoholic’s compulsion to not stop at one drink, will not markedly reduce the
intensity of drinking during particular consumption episodes. In their favour,
high taxes have major effects in restricting alcohol consumption among
adolescents (Saffer and Dave 2003).

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 The Economist’s Way of Thinking About Alcohol Policy

The question of whether low levels of drinking are harmful — or even

beneficial — is controversial. In assessing workforce costs, Pidd et al. (2006)
used self-reported measures of alcohol-related absenteeism to estimate 2.7 million
workdays were lost due to alcohol use in 2001, costing $437 million. Self-reported
measures of illness or injury absenteeism to determine absenteeism attributable
to alcohol use resulted in an estimate of 7.4 million workdays lost, costing $1.2
billion. Low-risk drinkers and infrequent or occasional risky and high-risk
drinkers accounted for 49–66 per cent of this absenteeism. This estimated cost
of alcohol-related absenteeism is far greater than previously reported and the
high incidence of costs by low-risk drinkers and those who infrequently drink
heavily was unexpected.
One approach to addressing concerns that external costs are concentrated
among a narrow group of high-consumption users is to levy moderate taxes but
to penalise intensively socially costly actions associated with high alcohol
consumption. Drink-driving and alcohol-related assault should be intensively
penalised as activities in themselves. Thus, the intoxicated person who walks
home from the pub and ‘sleeps it off’ is not taxed prohibitively; but if the same
person drives home or assaults a family member, then stringent penalties obtain.
Alcohol taxes in this event capture non-extreme social costs while particular
laws seek to capture externality costs.
(ii) Using volumetric taxes to penalise low-value, high-alcohol products creates
incentives for unfavourable substitutions towards other intoxicants. A
widespread intoxicant in Aboriginal communities is sniffed petrol, so there are
incentives to shift towards this if low-cost high-alcohol beverages become more
expensive. This is a ‘second-best’ constraint on alcohol taxes that reflects the
existence of untaxed substitute intoxicants.
Whether alcohol taxes will induce substitution towards alternative drugs
depends on whether alcohol and the drugs are substitutes — Cameron et al.
(2001) suggest cannabis and alcohol are substitutes — or complements. Williams
et al. (2004) suggest alcohol and cannabis are complements, so increasing the
price of alcohol will reduce cannabis consumption.
Attempts to tax alcohol-induced social costs efficiently require that
close-substitute intoxicants also be taxed or regulated efficiently. Policy design
must account for such cross-market interactions.
(iii) Measures of consumer gain from alcohol consumption given by the area
under a demand curve are exaggerated if there are self-control problems. These
can be dealt with by adjusting downward benefit measures to account for
compulsive consumption: the technique is used for gambling addictions
(Productivity Commission 1999).

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 Agenda, Volume 15, Number 2, 2008

Finally, apart from implementation difficulties some have argued that there
is a case for hypothecating a proportion of alcohol taxes to targeted alcohol
treatment and information programs (RACP 2005). The motivation is that such
revenues reflect social costs that alcohol creates. This is not true with the social
costs we have envisaged, which increase more than proportionately with total
consumption so optimal tax revenues exceed non-internalised costs.
Hypothecation is unsound anyway since desired investment depends on program
effectiveness, not only the damages alcohol inflicts. To take an extreme case, if
such programs had low effectiveness then little should be allocated even if social
costs are large. The function of taxes on alcohol is primarily to signal the social
costs consumers are imposing at the margin. Their revenue-yielding function is
secondary.

Final comments
The economic approach to alcohol policy focuses on the external costs of
consuming alcohol, not gross costs. It recognises that alcohol provides benefits
to consumers and supposes that internalised costs of use borne by non-dependent
consumers are irrelevant from society’s viewpoint. This is based on the utilitarian
precept that consumers should bear the full costs of their consumption and that,
given this, society should maximise net social benefits.
This approach provides a guide to policy design with secure utilitarian
foundations. Information should be provided to consumers so they assess
consumption costs accurately, including genetic information and self-control
problems that can develop. Self-control difficulties can be addressed with
appropriate policies for treatment and by adjusting measures of benefits from
consumption. With such adjustments, alcohol pricing forces prices of alcohol
to full social cost (Godfrey 2004)).
Despite these reasons for adopting the economic approach it has, in fact, been
applied only rather seldom. The main studies are for the US — Manning et al.
(1989), Pogue & Sgontz (1989), Heien & Pittman (1993) — and New Zealand
(Barker (2002). Anderson and Braumberg (2006: 68–9), in reviewing these,
comment on the difficulties of implementing them given problems of defining
externalities and of recognising the private component of health costs with a
public health system:
…externality studies…omit any consideration of the broad range of costs
borne by the individual drinker, and are more useful when conducted
alongside rather than in place of more common social cost studies. This
is particularly true given two contentious results of the assumptions in
many externality studies — first, that any harm within the household
(such as to the drinker’s partner, or children) is counted as a private cost;

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 The Economist’s Way of Thinking About Alcohol Policy

and second, that drinkers are both fully rational and fully informed of
the risks when they decide to drink.
This criticism rejects the liberal ethic underlying the economic approach.
The claim that intra-family harm should be included as a private cost was rejected
above because families do not make drinking decisions; individuals do. The
argument that groups of non-drinkers can best judge what a consumer should
consume is not always correct. Policies can be designed which address the needs
of problem drinkers while meeting liberal precepts and standards of economic
efficiency for most drinkers. To a liberal, paternalism is a questionable overall
basis for public policy.
Finally, it can be questioned whether this analysis applies to illicit substances
such as heroin or ‘ice’. A distinctive feature of these substances is that their
consumption is socially costly even at low initial levels, suggesting a case for
outright prohibition rather than regulation by taxes. With respect to activities
such as gambling and food consumption, which can be behaviourally addictive
and, in the case of foods, can lead to obesity problems, our analysis has value.
Taxes on gambling (Productivity Commission 1999) and ‘fat taxes’ on foods
(Jacobson and Brownell 2000) restrict consumption and can be pursued with
policies to address self-control issues.

References
Anderson, P. and Braumberg, B. 2006, Alcohol in Europe: A Public Health Per-
spective, Institute of Alcohol Studies for the European Commission, at:
http://ec.europa.eu/health-eu/news_alcoholineurope_en.htm.
Anderson P. and Wild, R. 2007, Little children are sacred: report of the Northern
Territory Board of Inquiry into the protection of Aboriginal children from
sexual abuse 2007, Darwin: Northern Territory Government.
Australian Bureau of Statistics (ABS) 2006, Alcohol Consumption in Australia: A
Snapshot, 2004–05, Canberra, 4832.0.55.001.
Australian Bureau of Statistics (ABS) 1994, Urban Aboriginal and Torres Strait
Islander Supplement, National Drug Strategy Household Survey, Canberra.
Australian Institute of Health and Welfare (AIHW) 2004, National Drug Strategy
Household Survey, Department of Health and Aging, Canberra: 2005.
Australian Institute of Health and Welfare (AIHW) 2006, Alcohol and Other Drug
Treatment Services in Australia 2004–05, Canberra.
Australian Institute of Health and Welfare (AIHW) 2007, Statistics on Drug Use
in Australia 2006, Canberra.
Baltagi, B. H. 2007, ‘On the Use of Panel Data Methods to Estimate Rational Ad-
diction Models’, Scottish Journal of Political Economy 54(1): 1–18.

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 Agenda, Volume 15, Number 2, 2008

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