Alcopops tax revenue refunded to who?

The alcopops tax has yielded a great deal of revenue although the bill justifying the tax may now not be passed by the Senate.  Apparently then the government has to return the revenue to the party who bore the tax.  The nominal incidence of such a tax is on the alcohol producers but, if demand is relatively inelastic - and that's what the solid revenue yields suggest - then the effective incidence is mainly borne by consumers so they should get most of the rebate.  It would, however, seem totally impractical to effect such rebates. 

I find it surprising that consumers are called upon to pay a tax that has questionable legality.  If the tax is not approved by the Senate that will be its status. I can't for the  life of me work out how Labor will get out of this mess.

To be clear I do support this tax and hope the Coalition will switch and vote for it. Its effectiveness will not be zero even if demands are quite inelastic.  Note that those who criticise it on the grounds that youth entirely switch to other sources of alcohol need to explain why the tax yields in fact such a lot of revenue. The existence of close substitutes suggests elastic not the inelastic demands that seem to prevail. Moreover this is consistent with average price elasticities on alcohol of around -0.6.

While the alcopops tax will not eliminate the problem of excessive youth drinking, it will help. Other measures - education and negative advertising - are a further useful component of a policy package.

A minimum price for booze

This is a cute microeconomics task.  From an group email sent to me by NCETA's Dr Anne Roche:

‘The National Centre for Education and Training on Addiction (NCETA) has been contracted by the Australian Government Department of Health and Ageing to conduct a feasibility study on setting a floor price for alcohol products. This study is being conducted nationally to determine if state and territory governments, working in conjunction with liquor licensing bodies, can introduce a floor price to control high-risk alcohol consumption.

For the purposes of this study, an alcohol floor price is defined ‘as a minimum fixed price per standard drink applied to all alcohol products in Australia’. Please note that an alcohol floor price is not a synonym for an increased levy or tax on alcohol. It is a distinct and unique strategy’.

The move is presumably an effort to stop heavy boozers from drinking themselves silly on cheap flagon wine. In a sense it is an imperfect surrogate for volumetric pricing. The latter identifies ethyl alcohol content as the prime cause of alcohol’s social costs and advises taxing accordingly in accord with the alcohol content of booze.

A key issue is how a minimum price would compare with a volumetric tax. One obvious effect is that the tax revenue would accrue to the government rather than as revenue to the booze companies.

The effect of a minimum price would be to force a switch towards better quality booze whose price lies at or above the minimum away from booze that is currently priced below the minimum. There would also be a reduction in overall consumption.

The measure would have very regressive impacts and will undoubtedly be criticized by non-thinking social worker types on these grounds. (It’s a dumb argument because regressivity should be assessed from the viewpoint of the total impact of the tax-transfer mix, not the impact of a particular tax).

It might restrain limited income youth from experimenting with booze which might be a good thing.

It would presumably foster the creation of homemade brews which might have some health and other costs.

It might encourage substitution toward non-alcoholic intoxicants via activities such as petrol sniffing and smoking cannabis.

It would reduce problem drinking by those with drinking problems though the precise effects are a matter of evidence. Dependent drinkers might often be income-constrained but their compensated price elasticities are likely to be low in any event. It is an empirical question which of these effects works harder.

NCETA are seeking submissions on this. If we got some good comments and some bright ideas we might send in this blog post as a joint contribution. What are your views on this proposal?

No need for moral panic over drugs

I have pointed out repeatedly that drug use in Australia is under control. Cigarette, heroin, amphetamine and cannabis consumption are declining and alcohol consumption is roughly stable. It is the reason I don’t support moves to reform drug laws on the grounds that current laws have failed – they have not failed at all.

An article in today’s Age makes the same points about alcohol.
Alcohol consumption has costs and benefits – to an economist this suggests trying to get the balance right in consumption and to persuade consumers not to drink in risky situations – such as prior to driving a car.

Proposals to redefine ‘binge drinking’ (meaning socially excessive drinking) to mean the consumption of half a bottle of wine (3 standard drinks) do not seem wise. All activities involve some level of risk but this risk must be balanced against benefits. Telling people who are not driving that they should not enjoy a half bottle of wine is destroying too much enjoyment and not addressing dangerously high levels of drinking and situations of drinking before driving or operating machinery.

The moral panic that is developing needs to subside a bit and the very real problems of drinking that do exist should continue to be addressed. As usage of dangerous illicit and licit drugs decreases then efforts to further reduce harm will need to become more focused – targeting indigenous Australians makes much sense – but this does not mean further coercion across the whole community.

Economics of alcohol policy

My paper 'The Economist's Way of Thinking About Alcohol Policy' has just been published in Agenda. I continue to work on these issues so comments are very welcome.

Australian drug use trends

The 2007 National Drug Strategy Household Survey has just been released (here). This is by far the most useful and accurate study of drug use trends in Australia.

Tobacco consumption continues to fall – less than 1 in 5 Australians smoked over the past 12 months. There is a very significant reduction in daily alcohol consumption – from 8.9% in 2004 to 8.1%. The most common illicit drug in Australia is cannabis – 9.1% of those aged 14 years and over had used cannabis during the last 12 months with strong continued decline in use among youth – use from 2004 to 2007 dropped from 11.3% to 9.1%. There is a significant* reduction in use of amphetamines/ice from 3.2% to 2.3% over this same period.

Heroin use remains very low at 0.2% in 2007 compared to 0.8% in 1998. The big supply reductions that occurred during the heroin drought of 2000 as a response to increase police interdictions seem to have permanently and significantly reduced heroin demands.

These are very positive signs which show that the campaigns against dangerous licit and illicit drugs do work. The only negative features are that ecstasy use remains high at around 3.4% of the population and cocaine use has increased significantly* since 2004 from 1% of the Australian population to around 1.6%.

An excellent report that isn’t too long. It is good reading if you wish to be informed about drug issues rather than adopting partisan views in the media and the drug treatment industry.

*Significance here means statistical significance at a 95% confidence level.

Increased tax on alcopops

The Australian Government's decision to increase the excise on so-called alcopops by 70% is excellent news. These sweet flavoured alcoholic concoctions are intended to create another generation of heavy drinkers in the face of a steady state decline in the demand for booze.

The industry is targeting kids who will suffer permanent brain damage from excessive alcohol use. This tax - which will add about $1 to the price of this rubbish - will help combat this.

The liquor industry ranks with the tobacco vendors as one of the most immoral in our society. Anything that damages their profitability and long-term prospects advances the social welfare. It is also useful that shareholders in these nasty businesses wake up to the long-term difficulties that these firms seeking to create alcohol dependencies will experience. You were warned!

A case for increasing the minimum age for legal drinking

The proposal to increase the drinking age in Victoria from 18 to 21 is back on the table. It will be considered by the State government if current policy efforts to restrict binge drinking fail.

I strongly support the move to restrict youth access to alcohol with such a policy. Alcohol is a neurotoxin that has particularly damaging effects on the brain at ages up to 25. In addition those who start drinking early are more likely to become alcohol dependent and drinking is a major cause of traffic accidents particularly among the young – they are much more at risk than older drinkers. Most importantly alcohol abuse at young ages delays development of the thinking parts of the brain.

The claim that such policies are sometimes ineffective is true but irrelevant. Making it illegal to consume alcohol at age less than 21 increases the user costs of gaining illicit supplies and provides an obstacle to youth drinking. It also sends out a negative message that can be backed up with empirical evidence of the neurotoxicity of alcohol for consumption at young ages.

I also strongly support bans on the advertising of alcopops and related alcoholic drinks that appeal to youth. Industry codes of conduct won’t work since the adult alcohol consumption market is declining and the industry depends on addicting young drinkers for its growth. I agree with Chris Berg of the IPA that advertising of alcopops is informative advertising which introduces young consumers to new products. But the information provided is misleading in that it does not warn adequately of the health risk dangers of drinking while young and falsely suggests a range of benefits associated with drinking alcohol.

By the way it is claimed that keeping the US drinking age at 21 cuts the road toll among 18-20 year olds by 13%. Despite this many US states are thinking about reducing the age limit.

The Federal proposal to put warning labels on alcohol containers can do no harm. The literature on deterring kids from smoking however suggests that the best way to deter kids from drinking excessively however is to portray drunken kids as losers which of course they are. The best costs to emphasise are those that relate to current fitness and social acceptability. Absolutely there should be no suggestion that excessive drinking is something that adults only can engage in.

To the standard charge when I make these posts that I am a hypocrite because I drink myself (or did* drink) I say balderdash. That has literally nothing to do with the issue being discussed which relates to the case for allowing young people to damage their brains. The issue of my own hypocrisy – or indeed stupidity - is irrelevant to this.

* I’ve been off the booze for 2 months 24 days. Researching the booze issue has changed my own attitude to the stuff.

Youth drinking & alcopops

This report on alcopops by Choice magazine is interesting. Basically youth consume such drinks without experiencing the taste of alcohilc beverages. The taste of alcoholic beverages is rather unpleasant to neophyte drinkers so vendors of alcoholic products market sweet-tasting, alcopops with a soft-drink or milk base and often laced with a tasteless alcohol product such as vodka, to encourage alcohol use among youth. Later these same youth will graduate to mainstream alcohol products.

This is an important marketing innovation since booze sales Australia-wide have stabilised in recent decades so that promoting a steady stream of new drinkers is the only way to expand booze markets. Although aggregate sales are stable problem drinking continues to increase – it is the second-largest cause of hospital admissions related to drug use (after smoking). I think this move is unambiguously a social bad and that the sale and marketing of alcohol products to youth should be much more strenuously regulated than it is at present. Industry self-regulation is a total joke.

Neuroscience suggests that it is best to postpone the consumption of alcohol until after age 25 when the forebrain has developed completely. Alcohol is a neurotoxin which kills brain cells and the incidence of alcoholism is strongly related to the age at which drinking is initiated – the earlier the greater the problem. We do not wish to have a community of dopey kids.

I reprint sections of the Choice report below. For accuracy it is worth pointing out that pure alcohol is tasteless although I know what Choice means here – alcopos do not have the strong flavours of adult alcoholic drinks. In addition it is worth stressing that many teenagers choose alcopops because they want to experience the effects of alcohol without the taste – so there need not be a deception here.

In addition to the usual charge that I am a hypocrite for seeking curbs on alcohol while being a drinker myself I plead partially guilty. I am a hypocrite but have the excuse of ignorance and being a product of my upbringing. In addition, of course, my hypocrisy has nothing to do with the case against alcohol abuse I frequently espouse. My hypocrisy is a little diminished of late – I have been entirely alcohol abstinent for a couple of months and - along with taking some regular exercise - I feel much better for it.

CHOICE test reveals 25% couldn’t taste the alcohol in alcopops

Teenagers find it hard to tell the difference between soft drinks and so-called alcopops, which are part spirit and part soft drink or milk, according to a CHOICE taste test.

Almost half of the teenage male taste test participants could not tell that Vodka Mudshake Original Chocolate, which is 4% alcohol by volume, contained alcohol.

Overall, one quarter of the participants, who for legal reasons were over 18, couldn’t taste the alcohol in alcopops, also known as ready-to-drink or RTD beverages.

In the test 78 teenagers aged between 18 and 19 were given four different alcopops, four soft drinks and a sample each of beer and wine, all in unmarked glasses. They also completed a survey about their drinking habits and some took part in focus groups to discuss alcohol and alcopops.

Referring to alcopops, one of the participants remarked: “I used to drink all of these when I was a bit younger… like when I was at school.”

The trendy packaging, colours and flavours were deemed attractive by teens, and the sweet flavours, which in the test included chocolate, raspberry, lemon and passionfruit, can mask the taste of alcohol. CHOICE thinks the regulation of alcopops marketing, and of alcohol more generally, doesn’t effectively protect teenagers.

“It’s clear from CHOICE’s test that the use of sweet flavours reduces the resistance many teenagers have to the strong and, to many of them, unpleasant taste of alcohol,” said CHOICE media spokesperson Christopher Zinn.

While there are codes of practice for the companies that produce alcopops and the advertising industry that promotes them, CHOICE says there are some gaps, notably the internet.

CHOICE found one vodka-based RTD promoted on a website aimed at girls, despite the policy of its maker only to target its brands at the 18-plus age group. The promo was removed after CHOICE pointed out to the manufacturer that its placement was inappropriate and conflicted with its policy.

Booze & kids

The debate over whether alcopops are designed to adapt the tastes of immature sugar-loving adolescents to drinking booze is ridiculous. Of course this is the intention. Who else would drink these sugary nasties!

Booze consumption in Australia has stabilised over recent decades so the only way to grow the market is to create a new generation of boozers.

The 'insider' revelations that the industry is targeting youth published in the press this morning should not surprise anyone. This is exactly parallel to the strategy of tobacco companies seeking to promote youth smoking - with reduced social acceptibility of smoking among adults and with high mortality from smoking the only way to grow this market is to encourage youth smoking.

Alcohol doesn't cause lung cancers but it does induce other cancers and does cause brain damage - 6 drinks a day over 8-10 years puts a male at high risk of damage.

Taxing alcohol & tobacco products

I found this webpage from the Australian Taxation Office on excise charges on alcohol and tobacco products very useful. Taxes ideally should reflect damages of these products which are presumably related to alcohol and carcinogen content respectively. With respect to alcohol this is volumetric taxation rather than ad valorem taxes levied on product value.

All forms of alcohol except wine are taxed volumetrically - at least as excise taxes – though there are quantity discounts for larger volumes sold, I assume in pubs and bars:

1. Low alcohol beer (less than 3% alcohol) in containers less than 48 litres is taxed at $32-78 per litre of alcohol exceeding 1.15% of volume. In larger volumes (greater than 48 litres) the tax drops to $6-54. Low alcohol beer on tap at the pub should be a comparative bargain!

2. High alcohol beer (greater than 3.5%) is taxed at $38-20 in low volumes and at $26-85 in larger volumes again per litre of alcohol exceeding 1.15% of volume. Not such a great bargain at the pub!

3. Other spirits are taxed at $60-42 per litre of alcohol.

Drinking spirits seems to attract an exceptionally high volumetric charge. If damage is proportional to alcohol content it would seem to make sensed to reduce the tax on spirits and raise it on beers. There would also seem to be no obvious basis for the quantity
discounts given to pubs.

Beer has three rates (full, medium and light) purported to encourage responsible drinking, resulting in $0.33 and $0.22 per standard drink. Spirits come out to be $0.75 per standard drink (except for brandy, which for some historical reason is $60.42). The per standard drink rates are taken from an information sheet put out by the Alcohol and other Drugs Council of Australia. So, given that firstly, the tax is paid on alcohol volume, and secondly that the rates are higher for higher alcohol drinks, the system is not only volumetric, but has built in incentives to consume lower alcohol drinks.

Wine is taxed on an ad valorem basis based on value. For cheaper cask wines this means a much lower rate of tax per unit alcohol than other alcoholic beverages.

Wine is thus treated quite differently from beerm, spirits and RTDs.

The problem seems to be mainly with wine. When the GST was introduced and various taxes done away with, the Wine Equalisation Tax was set such that prices didn’t change too dramatically. The WET rate is 29 per cent of the wholesale sale value (ad valorem). This makes it difficult to compare with the rates for other drinks, but the ADCA fact sheet quotes the WET to be about $0.22 per standard drink on bottled wine ($0.69 on a bottle selling for $32, according to a submission to a 2002 Senate Inquiry on the topic) and $0.07 on cask wine.

Wine has a higher alcohol content than beer or RTDs (which must be less than 10%), but the lower tax for most wines could in theory be due to the positive health affects that are attributed to wine. I don’t have any evidence for this next statement, other than the occasional headache after drinking cheap bubbly, but it is possible that the tax system encourages the consumption of wine with greater impurities including methyl alcohols, and hence worse health effects. Whether this is true or not, the very low tax on cask wine is out of proportion to other taxes and is a very weak disincentive to over-consume.

GST is payable on the price including excise or WET (I think paying a tax on a tax is a bit of a rort).

However, despite the volumetric tax which is applied to most alcohol products, it still gets plenty of airplay: “Dr Herron said taxation of alcohol should also be restructured with the aim of reducing harm in the community. ‘The basic taxation should be one determined by the volume of alcohol in the product with the necessary adjustment to promote responsible consumption.’ ” from SMH 31 Jan 2007

With respect to tobacco products:

1. Tobacco is taxed at $0.24301 per stick (for sticks not exceeding 0.8 grams) irrespective of tobacco composition. On a pack of 25 this is $6 per pack.
2. Other forms of tobacco (wet snuff, loose tobacco) the charge is a massive $300 per kilogram.

This isn’t ‘volumetric ‘in intent at all given that there are strong arguments for believing smokeless tobaccos are much safer than cigarettes. Cigars and pipe tobacco also see safer than cigarettes.

Even if damages are more difficult to map in terms of the composition of tobacco this does not seem a sensible arrangement.

Economists would also say that these taxes, in a second-best world, should be larger the less elastic are demands since then the excess burden or deadweight loss associated with raising a given amount of revenue is minimised. Since demands for alcohol and tobacco are quite inelastic this suggests a case for high taxes.

On the other hand some of these goods are often consumed by low income people so, to that extent, the taxes are regressive.

This post might be obvious to people working in these industries but some of these ideas are new to me. I would greatly appreciate knowing if I have got the interpretations wrong.

Impacts of new grog & porn policies on indigenous Australians

As I noted in an earlier post the Federal Government will ban alcohol and pornography in aboriginal towns and communities in the Northern Territory and deliver half of government welfare payments to Aboriginal parents in the form of vouchers to make sure the money is spent on food and essential items. Government payments will be made contingent on children attending school. Children under the age of 16 will have compulsory medical examinations and extra police, and perhaps even the military, will be seconded to enforce these regulations. The government will also compulsorily acquire – with fair compensation - land granted under the Aboriginal Land Rights Act for a period of 5 years, while these problems are dealt with. A proposal to introduce similar quarantining regulations on welfare payments to non-indigenous families with children considered at risk will be put to cabinet shortly.

The primary intent of these measures is to address the problem of child sex abuse.

I support these policies though I caution they will not work perfectly. A major issue is the extent of financial support given to them. In my view there are three primary objectives of such policies.

(i) By banning alcohol and pornography on aboriginal land a geographical distance is established between aboriginals who consume these products and those who don’t. Aboriginals can continue to consume grog and porn but they will need to do so at a distance from non-users. Aboriginals have high levels of alcohol abstinence – those who do drink often do so to considerable excess. My guess is this move will prove popular within most aboriginal communities. Those who criticize the policy on the grounds that aboriginals will continue to consume grog in non-aboriginal towns miss this point.
(ii) The bans on alcohol and pornography increase the user costs of such goods by making them less convenient to consume. This should reduce demand for them. There will also be less casual buying of alcohol based on ‘availability’. In urban centers it is known that levels of drinking and problem drinking are related to outlet numbers.
(iii) The decision to provide half of the value of social security payments as vouchers that cannot be used to purchase grog reduces the income available for purchasing alcohol or porn. Straightforward economic theory suggests that because alcohol is a ‘normal good’ – its demand depends positively on income – that this should substantially cut alcohol consumption.

Part of the hysteria of the ‘left’ blogs on these measures is based on the idea that alcohol consumption and child sexual abuse reflects social disadvantage. That is true but a socially disadvantaged aboriginal who does not have easy access to alcohol is better-off than one who does. Alcohol is an independent cause of aboriginal (and non-aboriginal) problems associated with social disadvantage.

Measures (i)-(iii) will have significant effects in reducing levels of drinking and the consumption of pornography. This is an important end in itself. But doing this will improve aboriginal health as well as reducing violence towards women and children.

My research into addiction suggests than to advantages (i)-(iii) one might add.

(iv) The policies cited will improve the welfare of heavy drinking aboriginals. People who drink vast amounts of alcohol until they are absolutely drunk on a regular basis are not rational consumers whose preferences need to be respected for reasons of ‘non-paternalism’. Those with an alcohol dependency and those who drink for ‘cue-related’ reasons may be better-off with policies that restrict their freedom.

The libertarian ideologues will froth at the mouth with this type of suggestion but in the drug and alcohol field this view is unexceptional. It makes very little sense to be obsessed with the issue of ‘free will’ in relation to people with a chemical dependency to ethyl alcohol or any other drug.

The image of young kids cowering in fear from adult sexual predators is one that, as a father, worries me. The thought too of women being bashed by drunken male partners is also one that makes me want to tell the devout libertarian paternalists to take their obsession with ‘freedom of choice’ and shove it.

Finally, giving kids medical examinations to test for sexual molestation in an environment where it is not uncommon is simple sense. It increases the chance that those carrying out these unspeakable acts will be detected and reduces their incentives to commit these acts.

Little Children are Sacred. This is true. Black and white kids are the hope of the world. Young kids are not racist, they have no cultural hang-ups and they offer the prospects for a better future. Aboriginal Australians have often received shocking, murderous treatment from the time of white settlement. They have lived in Australia for over 40,000 years and are one of the oldest cultures on earth. But that they have suffered horribly is no reason not to take action to deal with the grog and child-abuse problems that now beset them. We should not allow our own guilt to stand in the way of addressing this terrible problem that wrecks lives and destroys an ancient culture. Current policies (free money, access to booze) have failed miserably.

As Noel Pearson said:

‘We are dealing with children of the tenderest age who have been exposed to the
most terrible abuse…what matters more the constitutional niceties, or the care
and protection of young children.’

These policies are not going to work neatly. Improvements should be suggested and should be listened to. But the general thrust of the policies should be given bipartisan support. They should be given a chance. More than that, state governments should be encouraged to join in.

Banning grog & porn to cut child abuse

Levels of child abuse in Australian aboriginal communities are completely over the top - there is systematic abuse of young kids in many communities. Young girls and boys are routinely taken as sexual partners. Often the abuse is preceded by alcohol consumption and by the viewing of pornography. The Prime Minister’s move to ban alcohol and pornography in aboriginal communities is a dramatic move designed to deal with an extreme situation. Another part of the policy package, quarantining welfare payments from being entirely spent on booze, is a move that will cut alcohol and therefore child abuse as well as promoting health. Howard's statement is here.

This policy packages provide a partial prohibition scheme on alcohol that is designed to eliminate its availability on aboriginal land – some of these lands are 'dry' already. The policy is a worthwhile move even if some aboriginals do leave their lands to drink. Most won’t because aboriginals as a whole have high levels of alcohol abstinence – it is the few drinkers who consume at vast levels who are doing the extreme damage that is occurring. Quarantining welfare payments is close to being a rationing scheme –it effectively prescribes the consumption bundle chosen by a welfare recepient. This is draconian but will only be a coercive measure for those currently abusing their government welfare check. The check isn't that large and most should be spent on food and essentials anyway.

Economists generally don't like either prohibitions or rationing schemes but there are exceptional emergency circumstances here that drive the need for a policy shock. Moreover as John Howard acknowledged last night - past policies have failed.

The Guardian has a useful review including the predictable reactions from those who would put anti-discrimination above the problems being faced. There is a potent quote:

Alcohol kills an Aborigine every 38 hours and accounts for a quarter of deaths in the Northern Territory.

I am pleased to see that Kevin Rudd states he will support the PM’s move. Even the Northern Territory Government seems to welcome the move. This issue should be above politics and the move should be given a chance. No points scoring should be attempted from any side. It is an extremely difficult policy to make workable. As a community we need to try to make it work and to improve the policy so it does.

Kim at the lavatory blog sees the issue purely as a political move. She would. She has previously declared that women who had their genitals cut out might have prejudiced views on Islam. People who say they dislike seeing young children raped are presumably also acting in a biased self-interested way that has nothing to do with stopping the abuse - they just seek a 'wedge' issue that will increase their electoral appeal. I find Kim’s attitude more hideous than usual. Mark Bahnisch supports her – he searches for grounds to attack the policy and refuses to confront the real problem. For them both it is just another opportunity to attack John Howard. Its an indictment of LP's sick approach to politics.

The Little Children are Sacred report had this to say:

‘Alcohol remains the gravest and fastest growing threat to the safety of Aboriginal children. There is a strong association between alcohol abuse, violence and the sexual abuse of children. Alcohol is destroying communities. The Inquiry recommended urgent action be taken to reduce alcohol consumption in Aboriginal communities’.

The report also specifically mentioned the role of pornography. The claims John Howard is making are not fiction. So Howard is just concerned with politics Kim, Mark? He isn't but you both are.

Words cannot express my anger towards these leftist phonies. Do either of them have children? Can either of them not see any social issue - not matter how painful - other than in their nasty, partisan political terms?

The comments by Ken Parish are less prejudiced but still over the top. For sections of the 'left' the welfare of sexually-abused aboriginal kids can be sacrificed if there is the chance for a political attack on John Howard. The comments of Tim Dunlop I agree with almost entirely – the impact of the policies should be carefully thought through and we should try for a bipartisan approach.

Advertising booze to kids

Crikey.com today discusses industry self-regulation of restrictions on advertising alcohol to kids. They claim this self-regulation is a farce – a proposition I agree with.

‘You need look no further than this ad for Tooheys New to see why Australia has a nasty drinking problem. The ad features a street party with giant inflatable figures in happy bright colours and could easily be mistaken for a toy promotion - until the beer truck arrives'.

The industry’s self-regulatory Alcoholic Beverages Advertising Code – is a joke. A recent study published in Drug and Alcohol Review in January searched 93 magazines popular with youth, two-thirds of which contained at least one alcohol ad or promotion (including one featuring skateboards). 51% of these items appeared to contravene at least one section of the code.

Voluntary regulation won’t work if firms have an intrinsic motivation to not enforce it. The industry emphasises flogging their drugs to kids because sustained growth in the alcoholic drinks market requires growing numbers of youth develop a taste for booze. Across age groups Australians are not drinking more. Moreover, youth are being successfully targeted by industry so their growth objective is being achieved through sweet-tasting alcopops and so forth that help youngsters graduate from soft-drinks to alcohol.

There are good theoretical foundations and abundant evidence that marketing booze to kids is very effective – US research suggests a complete ban on advertising booze could reduce teenage drinking by 25% and binge drinking by 42%. Moreover, there is evidence alcohol causes specific brain damage in youth. A blanket ban on advertising to youth is justified and industry self-regulation will not work.

Governments must intervene. Real leadership from Mr Howard and Mr Rudd (or a cooperative agreement!) would see them both agree to take on the liquor industry to reduce hazardous levels of drinking among youth.

Indigenous involvement in crime

Via Andrew Leigh I got a link to this useful data base on ATSI involvement in crime. It is old (2002, why?) but as up-to-date as anything else available. It is a grim picture.

A quarter of ATSI had been subject to violent attack in the past 12 months. There are high rates of imprisonment and arrest also. These are closely linked to drug and alcohol abuse.

On the characteristics of those incarcerated:

• In 2002, 7% of ATSI aged 15 years and over reported having been incarcerated in the 5 years prior to the survey (11% of males and 3% of females).
• ATSI who had been incarcerated were more likely than those who had not been incarcerated to be unemployed (32% compared with 12%).
• Among ATSI who had been incarcerated, 30% reported risky/high risk levels of long-term alcohol consumption in the 12 months prior to the survey, compared with 14% of those who had not been incarcerated.
• In non-remote areas, 56% of ATSI who had been incarcerated reported using an illicit substance in the 12 months prior to the survey compared with 21% of those who had not been incarcerated.

In my view Don Weatherburn and Noel Pearson are right. It is not only that drug abuse is a symptom of social disadvantage – it is a substantial source as well. Isolated local ATSI communities should be helped to enforce 'dry areas' with blanket illicit drug and alcohol bans but these are impractical measures in urban areas.

More drivers test for drugs than for alcohol

Testing for drink driving has helped slash the number of fatal accidents involving alcohol from 40% of the total to 19%. The road toll has fallen overall also. But in an interesting twist of 1600 drivers tested in NSW one in 46 was found to have consumed illicit drugs – amphetamines, ecstasy and cannabis are popular. Random breath testing suggests only one driver in 130 will be over the legal drinking limit.

While random breath testing for alcohol consumption is widely applied there are negligible levels of testing for illicit drugs in NSW though higher levels of testing in Victoria. Moreover, the claim is that consumption of cannabis and amphetamines causes the same impairment to driving skills as exceeding the 0.05 alcohol consumption standard. Some evidence is here.

Rigorously policing the consumption of alcohol consumption among drivers but not penalising the consumption of illicit drugs creates incentives for drivers to strategically choose to consume the latter. Current arrangements represent a misallocation of detection efforts.

Incidentally the swab test used to detect illicit drug consumption only targets the 3 illicit drugs mentioned (and we know that injecting heroin users often drive, see also here) and it does not test for consumption of legally-prescribed drugs that may also impact on driving ability.

Living rationally under the volcano?

I am interested in Arcidiacono et al (2007) which deals with whether forward-looking ‘rational addiction’ models best explain patterns of smoking among late middle-aged men. The suggestion is that one cannot observe whether decisions by young people to smoke or drink are consistent with rationally thinking through the health consequences of smoking or not.

As a general rule relatively few adverse heath effects occur in the first half of life. Young males who smoke, according to Hodgson (1992), have the same cumulative probability of surviving to age 35 as non-smokers. At age 45 (age 65, age 85 respectively) the corresponding ratio of the cumulative probabilities is 1.02 (1.18, 2.11 respectively) so that a smoker faces a 2% higher cumulative probability of being dead than a non-smoker at age 65, 18% at age 65 and 211% higher at age 85.

This evidence surprises me. The impression I had gained from other studies was that the smoking risks over middle ages were larger than these. For example, Doll et al (2004) examine smoking behavior of 34,439 male British doctors over a 50-year period and found that long-term smokers died 10 years younger than non-smokers – that is possibly consistent with the Hodgson data. But among men born around 1920, Doll et al found that prolonged smoking from early adult life tripled mortality to 43 per cent among smokers compared to 15 per cent among non-smokers between ages 35-69 – this seems much larger than the increased cumulative probabilities cited above. Or am I missing something? Moreover, according to Doll et al cessation at age 50 halved the mortality hazard and cessation at age 30 avoided most of it. There are huge public health gains from getting people to quit cigarettes.

According to the Hodgson claims, the disease consequences of smoking only really bite in the second-half of a male’s life. This means that a young male may choose to smoke rationally with complete account taken of future harmful consequences (without relying on hypotheses of above-average discount rates or impulsiveness levels) simply because, even with moderate discount rates, the cost of a premature death in the second half of their life has low present value.

In fact, examining data on young males won’t tell you if they are rationally choosing to smoke with a reasonable discount rate or behaving irrationally and myopically by enjoying the future now without regard to future consequences. In short you cannot test the ‘rational addiction’ hypothesis of Becker and Murphy (1988) using data on young males.

The Arcidiacono et al (2007) paper itself examines whether late middle-aged males – who do face significant extra mortality risks from smoking (and drinking). Do these males update their consumption behaviour in the face of adverse health shocks? Do they display rational forward-looking behaviour or is their behaviour myopic? They find that older males are rational addicts with moderately high discount rates who fully anticipate the risks associated with heavy smoking and drinking even though smoking, while young, can make sense at moderate discount rates. Myopic models in this setting imply much higher levels of drinking and smoking than do occur. Rational addiction models imply lower levels of these consumptions because individuals account for their future health costs. This is hardly surprising given that the conventional wisdom supposes that older people are more mature and have lower discount rates than adolescents. They will also be observing the health consequences of smoking.

Smoking when young does pose particular neurobiological costs as I have suggested before that are real even if they are not necessarily fatal. Also those who begin smoking or drinking when they are young are more likely to remain addicted to cigarettes or to become alcoholics than those who start later in life. It is thus costly to smoke when you are young even though, according to Arcidiacno (2007) it may be rational to smoke if you don’t mind smelling like a compost heap throughout your life, and don’t worry too much about dying a decent way down the track because you discount the future at a plausible rate.

I think this is an interesting viewpoint. In the past I have argued that young people behave irrationally because they have high discount rates – they are impulsive and so on. The argument constructed by Arcidiacono (2007) suggests that this issue is unlikely to be resolved by appealing to evidence and that observationally it doesn’t matter much because of the life-profile of health risks.

Of Substance

One of the better publications I receive on licit and illicit drug consumption in Australia is Of Substance.

This is published by the Australian National Council on Drugs and is available in printed version or online free of charge (at www.ofsubstance.org.au) coutesy of the Department of Health and Aging. The April 2007 issue has just come out. It contains interesting articles. I’ll pick 3 examples.

An excellent article by Don Weatherburn on alcohol and indigenous Australians. The general argument supports Noel Pearson’s view that restricting the availability of alcohol and other drugs is better than spending a lot on treatment of abuse problems. Drug and alcohol problems, rather than social disadvantage, drive a great deal of indigenous problems with the criminal justice system. Education and employment are important but so too are the direct effects of drug and alcohol abuse.

The National Drug Research Group also points out that alcohol kills an indigenous Australian every 38 hours – mostly due to cirrhosis or suicide. The average age of their death is 35.

I also liked the review of the Australian Secondary Students’ Alcohol and Drug Survey for which I cannot find a weblink. More school kids aged 12-17 are alcohol abstinent since 1999 (29% in 2005 compared to 35% then) but the long-term trend in ‘problem drinking’ (more than 7 drinks in the past week in a single session for males) is discouraging (6% in 1984, 9% in 2005). The really good news is the massive decline in smoking. Current smokers were 19% of the total in 1999 and only 9% in 2005 while committed (addicted) smokers fell from 9% to 6% today. The fraction that used cannabis in the month before the survey halved over this same period from 14% to 7%. There are now more cannabis than tobacco users in our high schools.

Alcohol, neuroscience, genetics & public policy

I earlier presented a liberal-rational choice model of alcohol use and policy. In that model problem drinkers were a ‘nuisance’ minority. Although this soothed the wounds I had experienced from being described on this blog as ‘illiberal’ on drugs policy it really is a limited way of looking at what is a serious social problem. I drafted the notes below that concentrate on 'problem drinkers' for a larger study I am working on – comments are very welcome.

Background.

According to a recent ABS survey (discussed here):

• Levels of risky drinking have increased 50% over the past 10 years. 15% of male adults and 12% of female adults in Australia drink at 'risky' levels. Women are catching up.
• Alcohol is the second largest cause of drug-related deaths and hospitalisations in Australia - tobacco beats it - and alcohol is the main cause of deaths on Australian roads.
• In 2004, the age-standardised rate for male deaths due to alcoholic liver disease was 5.5 per 100,000 and 1.5 per 100,000 for females.
• In 2004, the age-standardised rate for male deaths with mental and behavioural disorders due to alcohol was 1.9 per 100,000 and 0.4 per 100,000 for females.
• From 1998-99 to 2004-05, the overall number of hospital separations with principal diagnosis of mental and behavioural disorders per 1,000 population increased by 39% for all ages (by 41% for those under 20 years).
• Most of the alcohol-related hospital separations among both men and women in 1998 was due to alcoholism and alcoholic liver cirrhosis. The second-largest number was due to road injuries for men and cancer for women.
• 31,132 died from alcohol-caused disease and injury from 1992-2001; of these 75% were male and 25% female. From 1993-94 to 2000-01, there were over half a million hospitalisations due to risky and high-risk drinking.

Alcohol is not an ordinary consumer good and its consumption cannot be analysed purely using a rational choice model of behaviour. As these statistics indicate people do get addicted to alcohol in an unconscious process that can eventually take over and ruin their lives.

Neuroscience and genetics

Most alcoholics start drinking as adolescents. Here standard motivations associated with specific adolescent behaviour (risk-taking, novelty seeking and peer pressures) increase the probability of experimenting with alcohol. At this age it is thought the desire to drink could be linked to incomplete development of certain brain regions involved in the processes of executive control and motivation. Studies suggest that the neuroadaptions that occur in adolescents exposed to certain drugs are different from those that occur in adulthood. Certainly there is a greater vulnerability to alcoholism in individuals who start using alcohol early in life.

Those who abuse alcohol have a higher incidence of mental disorders (depression, anxiety, ADHD and schizophrenia) than do the general population and those with these disorders have a much higher incidence of alcohol abuse. Those with mental disorders may use alcohol and other drugs to self-medicate.

There are also definite genetic influences on the propensity to consume alcohol. These genetic influences may partially underlie certain personality traits such as impulsivity, risk-taking and stress responsivity. Family and twin epidemiological studies suggest estimates of heritability of vulnerability to addictive diseases of between 30-60%.

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 these other drugs it releases extracellular dopamine levels in the shell of the nucleus accumbens. These pleasure centres have evolved to ensure survival but get ‘hijacked’ by alcohol.

It is this euphoria – particularly if it is enhanced by a genetic predisposition – which encourages repeat use. Like sex you don’t want to just do it once! Over time however alcohol can disrupt these reward circuits and produce dysphoric states such as withdrawal and craving. These negative reinforcements alternate with the positive reinforcement of euphoria to drive a cycle of addiction that becomes etched into the midbrain and frontal structures. This etching reinforces the pursuit of survival-related behaviours by dominating attention and decision-making.

Alcoholics face particular difficulties limiting the number of drinks they consume during a particular episode. The first drink leads to uncontrolled drinking during that episode.

These compulsions to use are not only short-term. Cues associated with alcohol (people, places, an alcohol advertisement) can trigger intense cravings among the alcohol addicted which can trigger relapse into use even after a protracted abstinence of months, years or even indefinitely. These cue-induced cravings can be measured using neuroimaging studies and show dramatic limbic responses that correlate with the degree of the reported craving.

Where does this lead to for public policy?

According to the neuroscience-genetic view excessive alcoholic consumption is due to mistakes that will often be initiated in adolescence. People who initiate consumption at this age may gain short-term pleasures from it but driven by genetic factors, neuroadaptions and alternating positive and negative reinforcements they become dependent on alcohol and find it difficult to control its consumption.

From this perspective alcoholism (contrary to the beliefs of liberals) is probably best viewed as partly a disease.

1. Liberal-rational choice modelling need not be thrown out the window entirely with respect to problem drinkers. Information of the type outlined above can be provided to consumers. There is some controversy over the specific implications of having alcoholic parents for the chance that progeny will develop alcoholism but there is enough evidence to suggest a warning might reasonably be given. If you are male and your (birth) father is an alcoholic you are very likely to face problems managing alcohol consumption should you choose to drink. Information concerning alcohol’s risks needs to specifically target youth while information that targets problem drinkers needs to address issues of problem-recognition, denial and treatment options.

2. Tax policies on alcohol sales are less likely to significantly reduce consumption among addicted users who have markedly inelastic alcohol demands. High taxes may encourage the decision to quit entirely but, given an alcoholic’s compulsion to not stop at one drink, will not reduce the intensity of drinking during a particular consumption episode. High taxes will have their major effects in restricting alcohol consumption among adolescents – these effects are very strong.

3. Restrictions on advertising are very effective in limiting drinking – particularly among youth. They are also useful for curbing drinking among abstaining alcoholics who are subject to cue-driven responses. This points generally to a case for limiting cues in the media, in movies and in public life that provide cues to drink.

4. Supply control measures on the number of outlets and on opening hours are known to limit alcohol consumption and the social damages associated with excessive consumption. Such measures limit the number of cues and also promote the ability of individuals to control their own drinking. Keeping away from cues and knowing that beyond a certain time drinking will be impossible helps people with self-control problems to limit the number of drinks they have.

5. Treatment options emerge as a major way of addressing excessive use. Local GPs can be effective people in cautioning people concerning alcohol problems. Promoting a variety of behavioural and cognitive therapies makes sense as do traditional routes to controlling use such as Alcoholics Anonymous. Given that there are social costs associated with alcoholism there is a case for publicly-subsidising the costs of such services.

6. Treatment options should include pharmacotherapies using drugs such as naltrexone. Naltrexone reduces daily drinking and diminishes alcohol-induced cravings. It even reduces alcohol cravings after a priming drink of alcohol and therefore reduces the tendency of alcoholics to lose control once they begin to drink. Again given the external social costs of alcoholism there is a case for publicly-subsidising such drugs.

Thinking about alcohol policy

I've taken a bit of flak for what are claimed to be my illiberal, paternalistic views on drugs policy. Last October I presented a paper to the Australian Professional Society on Alcohol and Other Drugs Annual Conference in Cairns. This provides what I think is a fairly liberal position that pretty much reflects my views. Comments are very welcome.

Abstract: A liberal economic perspective for thinking about alcohol policy is provided. This is based on ideas of market failure rather than on paternalistic public health approaches of minimizing the gross costs of alcohol consumption. Apart from avoiding paternalism, the liberal approach helps to design effective alcohol regulatory policies. It emphases information, self-control and externality motivations for policy. Proposals to levy taxes in this setting, based on alcohol content rather than value, face limitations when there are possibilities to substitute other intoxicants. There are also equity issues that reflect the fact that it may be poor people with alcohol dependencies and inelastic demands who purchase low-value, high-alcohol content beverages.

Introduction

This paper examines the policy case for intervening in alcoholic drink markets. It also analyses the form that interventions should take. The perspective rejects paternalistic wowserism which opposes drinking alcohol because of its claimed high gross costs. To the contrary, the liberal approach adopted supposes that alcohol yields consumption benefits in terms of its taste and effects, as well as costs, and that society’s objective is to maximize the difference between all benefits and all costs. Consuming alcohol is, for the most part, assumed to be a social, recreational activity - one way of dealing with the pressures of the day and of enhancing the enjoyment of life. The presumption is that, for most people, using alcohol is an informed, rational individual choice. In most cases this choice has relatively harmless implications for the consumer but, even if substantial harm is caused, that is not in itself taken as a necessary indication that use of alcohol should be restricted. The presumption is that individuals are generally the best judges of their own welfares. Thus, provided the potential for harm is recognized by users, and costs of such harms are borne by consumers themselves and assessed rationally by comparing benefits obtained to costs at the margin, restrictions are redundant. In short, the analysis starts from the presumption that alcohol consumption provides net benefits to most adults who drink based on informed individual choices.

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

The analysis recognizes that the consumption of alcohol has important 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 and violence, particularly within the family unit. These costs become important to an economic liberal if they are not borne by the individual alcohol consumer.

There are numerous government policies devised to regulate and restrict the terms under which alcohol is purchased and consumed. This paper provides a framework where such restrictions can be assessed in a consistent setting.

Medical and Non-Economic Approaches to Policy

Much of the community’s focus on alcohol consumption looks at the adverse health and neuro-psychiatric consequences of drinking alcohol. This is the gross ‘cost of illness’ approach to estimating the costs of alcohol consumption: see Godfrey (2004). There is concern with the health costs of excessive drinking either when this occurs on a regular basis or episodically and with alcoholic dependence. There is 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 as immediately prior to driving a vehicle. Particular interest is directed at drinking among youth: see e.g. RACP (2005), WHO (2004).

This work is valuable in articulating health cost implications of alcohol consumption and is often used to support a dramatic headline that points to the costly consequences of drinking alcohol. But this recognition does not help much in designing policy. To what extent should alcohol consumption be restricted? What are the costs, in terms of foregone benefits, of restricting consumption?

That drinking alcohol is risky behavior does not in itself suggest much about the desirability of drinking or the extent to which it should be restricted. This involves assessing the costs and benefits of alcohol consumption and making an evaluation of the case for restrictions based on these. The question is how to value the costs and benefits. Economics does this by assigning monetary values to the costs and benefits individual consumers experience through alcohol consumption as well as any costs and benefits that spillover to society as externalities because of this consumption. Policy analysis then seeks regulations and interventions which maximizes the difference between social benefits and costs.

Free market exchange by rational private consumers will maximize this difference between social benefits and costs if there are no external costs or benefits. Rational individuals then choose to consume whatever maximizes their welfare and advance society’s welfare. If there is a net external cost, however, free market exchange will not achieve this maximization since rational individuals, in making their consumption decisions, consider only the private costs they face. A restriction to reduce consumption to the point where net social benefits are maximized then makes sense provided the cost of the policy restriction is less that the net benefits lost by not employing it. This establishes a case for policy activism with respect to alcohol consumption. Moreover, looking at things in this way provides a conceptual and quantitative guide to the desired extent of the restriction.

From a liberal perspective, if consumers are aware of risks and costs of activities (whether they are drinking alcohol, smoking cigarettes, driving a car or bungy-jumping) there is no a priori case for restricting an activity unless there are net external costs. Simply identifying that costs and risks are associated with the consumption of alcohol does not suggest anything about the case for restrictions if one assumes that individuals are best equipped to make the choices which drive their welfare. Focusing on gross costs suggests only extreme, prohibitive policies.

One can reject the hypothesis that people make their consumption choices rationally on the basis of good information. Indeed some people may be viewed as having self-control problems in relation to alcohol consumption and may fail to identify harmful consequences of consumption. In part these are arguments for providing people with better decision-making skills and with access to better information.

Use of economics can help with policy design. Simply to recognize that consumption of a substance causes social harms does not in itself suggest efficient ways of addressing or reducing such harms.

Rationale for Intervention

There are three main market imperfections that create a case for restricting alcohol consumption. A fourth motivation for policy, paternalism, 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 an issue is whether consumers understand that ethyl alcohol is a neurotoxin - it destroys brain cells – with, in fact, very few health benefits, see Fillmore et al. (2006). It is also 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 strong effects on consumption, particularly for youth (Saffer and Dave (2003)).

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 is a market failure since information is a public good. Markets will develop to promote alcohol consumption 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: See Lundborg and Lindgren (2002). The same result has been observed with respect to smoking – smokers tend to overestimate the adverse health consequences of smoking: See Viscusi (2002). To the extent this is true public information campaigns that seek to encourage accurate perceptions of health costs should be oriented towards calming people’s fears of the consequences of drinking rather than attempting to heighten their awareness of health risks.

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 are particular issues of self-control among young drinkers who have high impulsiveness and those who have particular genetic predispositions to smoke.

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 (a good discussion is Phelps (1997, chapter 15)) and violent behavior by those intoxicated is a serious issue in the broader community.

Other alcohol-linked externalities include fetal alcohol syndrome and generally the damages caused by a drinker to family members. In some situations economists ignore intra-family costs on the basis that family units are regarded as making consumption decisions. This is clearly not the case with most alcohol consumption so family costs should be regarded as a third-party impact.

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 policy design purposes such arguments do not help. They do not take one far in considering a rationale for policy. On the basis of paternalism, alcohol consumption is opposed because one group in the community – doctors, scientists, religious leaders - assesses it to be undesirable. On the other hand considering paternalism might be a useful descriptive way of understanding some actual government regulatory policies – perhaps inefficient 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 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: see Fillmore (2006a). 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 already mentioned, the case for warning people of the health risks of alcohol consumption is weakened if people already exaggerate the risks. If particular at risk groups or particular health concerns arise then these should be targeted rather than general alcohol health warnings given.

2. Self-control policies. Policies for improving self-control include helping to demonstrate that alcoholism can be a consequence of recurrent drinking. There can also be provision of 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, since problems with alcohol consumption primarily stem from excessive consumption, personal rules relating to the number of ‘standard drinks’ one consumes per week, numbers of alcohol-free days that should be pursued per week or, in some cases, the pursuit of total 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. Such policies also increase the non-price user costs of consuming alcohol.

For particular age groups who are prone to excessive alcohol consumption there can be a case for 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 and self-control of drinkers in their ability to safely drive after consuming alcohol.

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

3. Externality policies. Economists 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 internalizes these external costs.

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: see Phelps (1997, p. 516). 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, see Young (1998, p.115) that simple uniform tax policies make sense. The theory is described in the graph below.



Here the market demand for alcohol q is illustrated along with the private marginal costs of consuming different amounts of alcohol. The demand curve measures the marginal benefits from alcohol consumption for all alcohol consumers. The private marginal cost curve c(q) includes the internalized private health costs, the costs of traffic accidents borne by the drinker, the alcohol purchase costs and so on. The social marginal costs of consumption are also illustrated. These comprise both the private marginal costs borne by consumers and the external social costs generated including the health costs borne by other people, the traffic accident costs born by others and the cost (in dollar terms) of violence and anti-social behavior to others. With a free market operating consumers will consume to the point where their private marginal benefits equal their private marginal costs – they operate at q2 and pay price p2 for their consumption. Because social costs exceed marginal benefits over the range q1 to q2 consumption this imposes net social costs or deadweight losses (DWLs) to the community from drinking equal to the dollar value of the area ABC.

The standard economic prescription in this situation to remove these costs is to levy a Pigovian tax t which raises the price of alcohol consumption to p1 and leaves alcohol consumption where marginal private benefits equal marginal 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. Selvanathan et al. (2004) provide price 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 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 in Australia is already taxed at a lower rate that full-alcohol-strength beer in accord with volumetric principles (Commonwealth of Australia (2005, chapter 5)).

The distinctive feature of this economic approach is that it does not focus on the gross costs of consumption, GC. Thus it does not focus on the total medical, road accident costs and so on that can be attributed to alcohol consumption. In the figure these would be represented as the area 0q2BE. Nor does it focus solely on the non-internalized net costs less benefits (NC) of alcohol use – the medical or road accident costs not borne by alcohol consumers less consumption benefits as given by the area ECB. Instead the economic approach recognizes that alcohol consumption yields benefits to consumers that are given by the area under the demand curve.

The approach seeks to enforce a tax-inclusive price and a level of alcohol consumption that maximizes the net social advantage here the value of the benefits consumers derive from alcohol consumption less all the costs consumers impose irrespective of whether they are internalized or not.

Conclusions and Final Remarks

The economic approach to the costs of alcohol use focuses on the external costs of consuming alcohol not gross costs. The approach recognizes that alcohol provides benefits to consumers and that those costs of consuming alcohol borne by consumers themselves are irrelevant from the viewpoint of society. The economic approach to alcohol policy is based on the utilitarian precept that alcohol consumers should bear the full costs of their consumption and, given this, that society should then maximize net social benefits from consumption.

The advantages of this approach are that it implies a clear guide to policy design. Information should be provided to consumers so they correctly assess the costs and benefits of alcohol consumption including the self-control problems that can develop with alcohol consumption. Self-control difficulties themselves can be addressed with appropriate policies for treating such difficulties and by adjusting measures of the benefits from alcohol consumption. With such adjustments alcohol pricing can force the price of alcohol towards its full social cost (Godrey (2004)).

Despite the strong theoretical reasons for adopting the economic approach it has, in fact, only rather seldom been applied. The main studies are for the United States (Manning et al. (1989), Pogue & Sgontz (1989), Heien & Pittman (1993)) and New Zealand (Barker (2002)). Anderson and Braumberg (2006, p. 68-69) in reviewing these studies comment on the difficulties of implementing them given the problems of defining what are external costs and particularly in recognizing the private component of health costs in a country with a public health system:

‘…externality studies …evidently 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; and second, that drinkers are both fully rational and fully informed of the risks when they decide to drink’.

This is a political criticism that rejects the liberal ethic underlying the economic approach. The claim that harm within the family needs to be included as a private cost is rejected in this paper as families don’t make drinking decisions, individual consumers do, so there is no reason to treat such costs as private. The second point suggests that a group of non-drinkers can better judge what a consumer wishes to consume than the consumer themselves. This might sometimes be so but clearly not always. To a liberal it is a questionable basis for public policy.

References

P. Anderson & B. Braumberg, Alcohol in Europe: A Public Health Perspective, Institute of Alcohol Studies for the European Commission, 2006. http://ec.europa.eu/health-eu/news_alcoholineurope_en.htm.

F. Barker, ‘Consumption Externalities and the Role of Government: The Case of Alcohol’, Working Paper 02/25, 2002, New Zealand Treasury, http://www.treasury.govt.nz/workingpapers/2002/twp02-25.pdf

L. Cameron & J. Williams, ‘Cannabis, Alcohol and Cigarettes: Substitutes or Complements?’ Economic Record, 2001, 77, 236, 19-34.

D. J. Collins & H.M. Lapsley, Counting the Costs: Estimates of the Social Costs of Drug Abuse, Commonwealth Department of Health and Aging, Canberra, 2002.

Commonwealth of Australia, Review of the Schedule to the Excise Tariff Act, Industry Discussion Paper, Canberra, 2005.

K. Fillmore, T.R. Stockwell, W. Kerr, T. Chikritzhs & A. Bostrom,. ‘Has Alcohol Been Proven to be Protective Against Coronary Heart Disease? Response to Eight Commentaries’. Addiction Research & Theory. (In Press) 2006a.


Fillmore, K., T.R. Stockwell, W. Kerr, T Chikritzhs, & A. Bostrom, ‘Moderate alcohol use and reduced mortality risk: systematic error in prospective studies’. Addiction Research & Theory, 14, 2, 101-132. 2006.


C. Godfrey, ‘The Financial Costs and Benefits of Alcohol’, Paper presented to the European Alcohol Policy Conference: Bridging the Gap, Warsaw 16-19 June 2004 (available at http://www.eurocare.org/btg/conf0604/papers/godfrey.pdf).

D.M. Heien & D.J. Pittman, ‘The External Costs of Alcohol Abuse’, Journal of Studies on Alcohol, 54, 1993, 302-307.

P. Lundborg & B. Lindgren, ‘Risk Perceptions and Alcohol Consumption Among Young Adolescents’, Journal of Risk and Uncertainty, 25, 2002, 165-183.

W.G. Manning, E.B. Keeler, J.P. Newhouse, E.M. Sloss & J. Wasserman, ‘The Taxes of Sin: Do Smokers and Drinkers Pay Their Way’, Journal of the American Medical Association, 261, 1989, 1604-1609.

C.E. Phelps, Health Economics, Addison-Wesley, 1997.

T.F. Pogue & L.G. Sgontz, ‘Taxing to Control Social Costs: The Case of Alcohol’, American Economic Review, 79, 1, 1989, 235-243.

Productivity Commission, Australia’s Gambling Industries, Volume 1, Melbourne 1999.

E.A. Selvanathan & S. Selvanathan, ‘Economic and demographic factors in Australian alcohol demand’, Applied Economics, 36, 2004, 2405-2417.

T. Kue Young, Population Health, New York, Oxford, 1998.

Royal Australasian College of Surgeons, Alcohol Policy: Using Evidence for Better Outcomes, RACP, Sydney, 2005.

H. Saffer & D. Dave, Alcohol Advertising and Alcohol Consumption by Adolescents, NBER Working Paper No 9482, National Bureau of Economic Research, 2003.

W. Kip Viscusi, Smoke-Filled Rooms, University of Chicago Press, Chicago, 2002.

J. Williams, R. Pacula, F.J. Chaloupa, H. Wechsler, Alcohol and Marijuana Use Among College Students: Economic Complements or Substitutes? Health Economics, 13, 9, 2004, 825-843,

World Health Organisation, Global Status Report on Alcohol 2004, World Health Organisation, Geneva, 2004.

Penalising drunks who kill

More interesting analysis from the law and economics, Becker-Posner blog. This time B-P address drink driving penalties. I like this blog so much because it addresses significant issues of social importance using the sort of economics any well educated person can understand.

Gary Becker estimates that the cost per drunk driver arrested of drunk driving in the US is about $10,000. This is the order of magnitude he asserts should be levied as ex ante fines on drunk driving – or the ‘equivalent’ in license suspension costs or imprisonment. He argues that such hefty penalties would reduce the scale of alcohol-induced deaths on US roads to the levels of European countries where very heavy penalties are standard.

Richard Posner responds that the Becker ex ante penalties makes sense only if the theoretically more sound proposal of penalizing ex post those drivers who do kill an innocent by the cost of the innocent’s life fails to deter drink-driving deaths. He estimates the value of a statistical life at $7 million so, if 10% of drink driving offenders fail to be convicted, he argues that any driver convicted of killing an innocent should be penalized $7/0.9 = $7.8 million.

The case for ex post penalties is hardly convincing to me. Although it is true that most drink driving does not involve the death of an innocent party, motorists exaggerate the extent to which they can manage risk-less driving when drunk. The general point of each author’s analysis however is that the external costs of drink driving are huge.

It would be a simple matter – and I might do it myself as a 2007 New Year’s resolution – to compute the optimal scale of penalties in Australia (from ex post and ex ante perspectives) for drink driving. Penalties here are currently higher than the US. Compared to the US where 40% of road accident fatalities involve drunkenness the figure in Australia is ‘only’ 31%. But still the Australian courts are increasingly reluctant to imprison even repeat drink-driving offenders and sentences for killing innocents on the road are often pathetically small.