Thinking about alcohol policies

I have been thinking generally about the policy case for intervening in alcoholic drink markets and the form that such interventions should take.

To be clear I am not a wowser who opposes drinking alcohol – to the contrary I enjoy consuming alcohol for its taste and effects. Consuming alcohol is typically a social, recreational activity and is one relaxing way of dealing with the pressures of the day. For most people using alcohol in this way is relatively harmless. In short I start from the premise that alcohol consumption provides net benefits to most adults who drink.

Moreover, alcohol is a drug that, for adults, is generally legal to consume and socially accepted. It is also consumed by a significant proportion of the population in diverse settings.

But the consumption of alcohol has costs particularly when consumed at high levels or when consumed in a risky way. Alcohol consumption has seriously harmful physical and mental health effects, can lead to anti-social and even dangerous behavior such as drink-driving or violence.

Moreover there are in fact a myriad of government policies that have been devised to regulate and restrict the terms under which alcohol is purchased and consumed.

Medical and Non-Economic Approaches to Policy

Much of the community focus on alcohol consumption looks at the adverse health and neuro-psychiatric consequences of drinking alcohol. There is particular concern with excessive drinking either when this occurs on a regular basis or episodically and with alcoholic dependence. There is often also concern with social problems associated with drinking, in the workplace and in the home, with violent crime and intentional cause of injuries associated with drinking and with drinking on inappropriate occasions such prior to driving a vehicle. Particular concern is directed at levels of drinking among youth.

There is no question that this work is of overwhelming value but it does raise a few basic questions. Identifying that problems are associated with the consumption of alcohol does not, in itself, suggest how these problems are to be addressed. There is some advantage to attempting to value, in dollars, the various problems that do arise and using economic theory to help with the task of designing policy.

As a simple example of this one can note that in Australia, attaching costs to different types of substance abuse problems shows that, in terms of social costs, the consumption of alcohol and nicotine vastly dominate the costs of consuming so-called illicit drugs.

In addition use of economic theory can help in the task of policy design. Simply to recognize that consumption of a substance causes social harms does not in itself suggest ways of addressing or reducing such harms.

Rationale for Intervention

From a liberal economic viewpoint it seems to me there are four main pillars on which control of alcohol consumption might be considered. The first three of these are ‘market failure’ reasons for limiting in some way the consumption of alcohol while the fourth is a real politic reason.

1. Information. Efficiency in market exchange requires that the purchaser of a product understands fully the characteristics of that product. With respect to alcohol the issue of whether consumers understand that ethyl alcohol is a neurotoxin (it destroys brain cells) and in fact has very few (if any) health benefits. It is unclear whether consumers understand the genetic basis for alcohol self-control problems.

The information difficulties are compounded by advertising and promotion of alcohol which links consumption to sporting and social prowess. There is strong evidence that such advertising has very strong effects on consumption particularly for youth.

Finally, there might be particular age, ethnic or socio-economic groups in the community that have poorer information than other groups.

The failure to provide good information about the negative consequences of drinking alcohol can be regarded as a form of market failure since information is a public good. Markets will develop that promote the consumption of alcohol since this benefits particular industry groups but there are no such private incentives to provide information that presents the negative consequences of consumption.

On the other hand there is some evidence that some young people overestimate some risks associated with alcohol consumption - particularly the risks of becoming alcoholic. This overestimation leads to less drinking than would occur were the risks accurately perceived. The same result has been observed with respect to smoking - smokers tend to overestimate the adverse health consequences of smoking.

2. Self-control issues. Alcohol consumption can be addictive and people may have problems curtailing their consumption. There are high levels of alcoholism in the community and evidence that people take efforts and expend resources trying to control their alcohol consumption.

Self-control problems can be triggered or initiated by impulsive behavior and those who do have persistent problems controlling their alcohol consumption may have demands reignited by advertising and other cues.

There may be particular issues of self-control among young drinkers who have high impulsiveness and those with a particular genetic predisposition.

3. Externalities. Alcohol consumption creates private costs for individuals and more general social costs for those close to alcohol consumers and the broader community. Drink driving is a serious cause of traffic accidents and violent behavior by those intoxicated is a serious issue in the broader community.

Other alcohol-linked externalities include fetal alcohol syndrome

In addition in countries like Australia with a publicly-funded national health scheme the medical costs of alcohol consumption are nor borne only privately by the individual. Above-average medical costs will be met partly from the public purse. For this reason alone there can be a public interest in restricting use of alcohol.

4. Paternalism. Finally although it does not at all fit into the liberal, ‘market failure’ category of reasons for intervention in alcoholic beverage markets it must be admitted that there are strong moral and emotional arguments against excessive alcohol consumption. Some would oppose certain levels of alcohol consumption even if well-informed consumers without self-control problems did bear all the costs of their consumption.

This could result in alcohol taxes being set above their externality-correcting levels to reduce alcohol consumption. It could also motivate public health campaigns to be launched to decrease alcohol consumption not because external costs are being generated but simply because reduced alcohol consumption is a social objective.

For the most part I do not consider such arguments since they do not take one far in considering a rationale for policy – alcohol consumption is opposed because it is opposed. On the other hand paternalism might be a useful descriptive way of understanding some actual government regulatory policies that do operate.

Policy Interventions

Given the ‘market-failure’ reasons for seeking to restrict alcohol consumption what are the policy options for regulating alcohol use?

1. Information-related policies. The public sector may need to intervene to provide accurate information about some of the negative consequences of consuming alcohol and to restrict advertising that emphasizes inaccurately optimistic positive consequences of consumption.

The negative consequences of alcohol consumption include information on self-control issues and on genetic information that might suggest possible future problems.

A difficulty here is that there might be disagreement about the health consequences of consuming alcohol. The debate over the possible health benefits of consuming alcohol in reducing heart disease is a case in point. Apart from providing accurate information on health consequences there is also then a case for investing in the provision of improved knowledge on the health consequences of consumption.

In addition as mentioned the case for warning people of the health risks of alcohol consumption is weak if people already exaggerate those risks.

2. Self-control policies. Policies for improving self-control include helping to demonstrate that alcoholism can be a consequence of recurrent drinking and for providing means for individuals to improve their self-control by promoting such things as personal rules or heuristics that consumers can use to control their drinking behavior. In particular problems with alcohol consumption primarily stem from excessive consumption so that personal rules relating to the number of standard drinks one consumes per week, alcohol-free days per week or in some cases the pursuit of abstinence can be useful. These are primarily information policy issues.

Self-control can also be improved by restricting the availability of alcohol in various ways – by limiting the availability of alcohol outlets, by restricting trading hours and by limiting the promotion of advertising that might trigger cues to drink.

For particular age groups who are prone to excessive alcohol consumption there can be outright bans on consumption. Minimum age laws or restriction of the availability of alcohol to people with particular ethnicities such as Australian aborigines in particular locations are candidate policies.

With respect to drink-driving issues the installation of ignition interlock devices can be understood as a technique improving the judgment of drinkers about their abilkity to safely drive.

Finally those with self-control problems should be made aware of the existence of help groups such as Alcoholics Anonymous.

3. Externality policies. Economists tend to focus on externalities as a primary source of social costs in relation to substance abuse. The most standard economic prescription is to levy a tax which captures the extent of the external costs.

It is important to be clear on the issues here since they are not straightforward.

Externalities such as drink-driving induced accidents cannot be dealt with by a simple tax directed toward alcohol consumption since the externality here stems from the combined activities of drinking and driving. Moreover we know that the probability of an accident given a certain level of alcohol consumption increases with age. Inevitably highway patrols and booze buses are used to detect drink driving with alcohol-involved driving being penalized by fines and penalties rather than taxes on alcohol consumption.

It is only if alcohol-related externalities are related to the overall level of a population’s alcohol consumption (the ‘populational health’ view) that simple tax policies make sense. The standard economic prescription in this situation to remove these costs is to levy a Pigovian tax which raises the price of alcohol consumption to leave a level of consumption where marginal private benefits equal marginal social costs. This is widely-regarded as one of the most useful policies for reducing alcohol-related social costs.

Determining the size of this tax depends on assessing the scale of the unpaid for social costs and how these are linked to consumption at the margin. It also depends on the elasticity of demand of consuming alcohol – the more responsive demand is to the tax the smaller the tax can be. Price elasticity estimates of -0.3, -0.4 and -1.3 are reasonable for Australian beer, wine and spirit consumption respectively. For alcoholic beverages as a whole an estimated price elasticity is -0.6 suggesting that a 10% increase in price would cause a 6% reduction in consumption.

Clearly if the social costs are related to the alcohol content of drinks then it should be designed to reflect this fact – it should be a volumetric tax related to the alcohol content of particular types of alcoholic beverage and not an ad valorem excise levied on the value of the alcoholic products sold. Light beer is already taxed at a lower rate than full-strength beer in accord with this volumetric principle.

There are two reservations with respect to this very standard tax prescription and these are to some extent interlinked.

First note that the approach optimizes the overall social advantage but will have different effects on different groups. If a minority of alcohol consumers has very inelastic demands because they have self-control issues with respect to alcohol consumption then their consumption might need to be exposed to very high taxes if it is to be curtailed. Such taxes will impose heavy burdens on those who consume at moderate levels and who do not impose significant social costs. On the other hand setting lower taxes to cater for those imposing low social costs will leave the behavior of those who impose big social costs largely unchanged while significantly reducing their real incomes. If high alcohol consumers are the socially disadvantaged this can be a problem in itself. While gainers from effectively taxing alcohol can in principle compensate loses this type of compensation is very difficult to engineer in practice so that distributional issues limit the case for such taxes.

Second, note that using volumetric taxes to penalize low-value high-alcohol products might cause unfavorable substitutions towards other intoxicants or drugs. A widespread intoxicant in some aboriginal communities is petrol-sniffing. There might be incentives to shift towards such drugs, or other illicit substances if low cost high alcohol beverages become more expensive. This is a ‘second-best’ constraint on the tax that might be set here that reflects the fact that substitute intoxicants cannot readily be taxed.

Whether taxes on alcohol will make people substitute towards alternative drugs depends on whether alcohol and the drug are substitutes or complements in consumption. If they are complements increasing the price of alcohol will reduce alternative drug consumption. If they are substitutes such taxes will increase it.

Finally, many suggest a case for dedicating a proportion of alcohol taxes (hypothecation) to targeted and well-evaluated alcohol programs including programs to advise of the negative effects of consuming alcohol. The motivation is presumably that such revenues reflect the extent of social costs that alcohol creates. This may or may not be true since social damages may or may not be proportional to total community consumption. But this philosophy is in any event not sound since the investment in such programs depends on their 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 alcohol’s social costs are large. The function of taxes on alcohol is primarily to signal the correct social costs alcohol consumers are imposing at the margin. Their revenue-yielding function is secondary.

This is a draft of a paper on the economics of alcohol policy for non-economists. Comments are welcome.