The Price is Right?

How much does a drink really cost? Many use alcohol responsibly, but one study found that thanks to DUI accidents, crime (impacts on victims, costs of policing, and costs of incarceration), shortened lifespans, medical and psychological care for drinkers, and impaired productivity, the total cost of alcohol abuse approaches $700 per American per year (about $860 in today’s dollars).

Who’s getting stuck with the tab? A large portion of the total cost falls on the drinkers themselves, which might reasonably be considered to be their own business. But much of the burden is also borne by drinkers’ families and friends, and by society as a whole.

As I’ve written before, economists generally believe that the “external costs” of an economic activity (i.e. its impacts on others besides its producers and consumers) should be factored into its price. If producers and consumers don’t consider the harm (or benefit) that their actions cause others, they will create more (or less) of a good than is optimal from the point of view of society.

The steep external costs of alcohol consumption suggest that government should use price signals to moderate drinking. But do prices make a difference, or is drinking the sort of behavior people will do no matter how outlandish the cost (which you might have observed the last time you were at a sports stadium or concert venue)?

Well, it depends on how you look at it. For goods in general, studies have found that consumption drops by about 2.6 percent for every 1 percent increase in price (see this from Tammo H.A. Bijmolt, Harald J. van Heerde, and Rik G.M. Pieters).

Alcohol use is much less responsive to prices. Craig A. Gallet reviewed 132 papers on the topic and reported the average study showed that alcohol consumption, over the long term, drops only 0.82 percent for every 1 percent increase in prices. This may be testimony to alcohol’s addictive power; cigarettes sales are even more insensitive to price hikes.

If addiction is a real issue here, we might expect to find that heavy drinkers are more resistant to price increases than lighter drinkers. Indeed, the evidence shows this is the case. Light drinkers are more likely to cut back on consumption when prices rise, while heavier drinkers tend to compensate by switching to cheaper hooch rather than drinking less.

However, prices do have some effect on even heavy drinking; it has been shown to drop about 0.3 percent for every 1 percent increase in alcohol price. This raises a tough question: would it be right to pursue a policy that disproportionately disadvantages those who drink responsibly, if it will have at least some positive effect on those who are the true menace?

There is one possible upside to alcohol’s relative resistance to price increases. Since prices would rise more than drinking would drop, taxing alcohol more aggressively should translate into an increase in the total government tax take, which, depending on your views about government, might be a good thing.

What level would alcohol taxes have to reach to match the costs drinkers impose on society? In 1996, Donald S. Kenkel estimated that taxes would have to quadruple. Or, to think of it another way, taxes should about equal the price of the drink itself. Very roughly, this would hike the cost of a six pack of one of the mass-produced American beers from about $6.00 to about $10.00.

Many of you would undoubtedly consider this an intolerable burden. Perhaps it would be. But it should be noted that both historical and cross-country comparisons indicate higher taxes would not be totally outlandish.

Factoring in inflation, alcohol taxes were once far higher in the U.S. The current federal tax on beer would have to triple (to about $1.15 per six-pack) to equal its 1951 rate in real terms.

(How has this happened? Since 1951, the federal excise tax on beer has been raised exactly once. Liquor taxes suffer from much the same problem (or benefit, depending on your point of view) as gas taxes; they aren’t indexed to inflation. This means frequent action is required to update the rates to keep pace with other prices and wages. And given inertia in the legislative process and the fact that the producers have far more economic and political clout than public interest advocates, this rarely happens.)

The experience of other nations also indicates that higher taxes on alcohol are not necessarily incompatible with human freedom and well-being. As of 2003, U.S. taxes on distilled spirits ranked 20th out of the 26 nations in the OECD, a rich countries’ club. Our tax rate was two-thirds of Germany’s, three-fifths of France’s, less than three-tenths of Britain’s, less than one-fourth of Ireland’s, and about one-tenth of Norway’s.

It is interesting to note that in every one of those countries, alcohol consumption is higher than in the U.S., so higher liquor taxes don’t necessarily mean an end to the party.

One other interesting fact: despite heavier drinking, all of those nations have lower drunk driving rates, when measured as the percentage of fatal crashes that involve alcohol, than we do.

This suggests that it may be possible to address the externalities issue by tackling the specific problems caused by alcohol abuse, as opposed to using more indirect methods to discourage drinking like taxation. Kenkel estimated that if we could magically do away with DUI, we should still optimally raise taxes on alcohol (due to liquor’s other deleterious effects), but that the increase should only be about a dollar a six pack and not four dollars.

So coming up, I’ll look at the effectiveness, efficacy and ethical implications of several of the proposed policies that specifically target DUI. And I’ll conclude this series by letting you know about the magic bullet: the one solution which would completely eliminate DUI, while allowing us to both drink and drive absolutely as much as we please – and which nobody’s talking about. More soon.

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  1. Howie says:

    I don’t get your fascination with alcohol.

    DUI numbers are so skewed it’s nearly impossible to draw rational conclusions. For example, if someone had one beer, and if they were going through a green light and were struck by another car who ran a red light, then this counts as a DUI accident, even if the person who ran the red light was not drinking.

    I’m sure if some clever person wanted to, they could show the economic impact associated with picking one’s nose.

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  2. Robert Withers says:

    Interesting analysis. But I question some of the assumptions. As a drinker, I don’t have DUI accidents, don’t commit crimes, don’t use extra medical and psychological care. How is it a social cost if I have a shortened lifespan or impaired productivity? In the cosmic scheme of things I question the economic evaluation of my lifespan or “productivity.” Shorter lifespans might be of greater social utility. Productivity is the ideology of the hive.

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  3. Justin James says:

    As it is something like 80% of alcohol tax is paid for by the bottom 20% income bracket. Now you want to increase their tax burden further? If you have ever known an alcoholic, you would know that the last thing they or their families need is for them to spend even more money on their alcohol. Not to repeat myself, but Mr. Morris, you need to learn more about alcoholics, addicts, and the nature of addiction before you write about this topic further.

    J.Ja

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  4. Eileen M. Wyatt says:

    Causation versus correlation: as always, the example countries with lower drunk-driving rates also have higher urban density and more extensive and reliable mass transit than the U.S.

    Since the essay also states alcohol consumption in those countries is *higher* than in the U.S., claiming that high taxes lead to low consumption also seems dicey. It’s possible people in those countries might consume more if alcohol were cheaper, but it’s not proven.

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  5. Joshua says:

    If only we had a Breathalyzer hooked up to a vending machine that upped the price based on how drunk you were (and cut you off) …

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  6. Jamie says:

    re: lower drunk driving rates in countries compared to the US, what is the impact on available public transportation?

    If I’m in Manhattan it’s a lot easier to not drink and drive than if I’m in Wyoming and a 20 mile drive from home when I’m 8 beers into it…I’d say very optimistically that only 5% of Americans have easy access to non-personal, non-price prohibitive (i.e., taxis a long distance) transportation. The other 95% are using cars to go everywhere.

    How does the US rate compare with that of other countries?

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  7. Jamie says:

    Sorry Eileen, you beat me to it and I didn’t see your post. Read my post as one “thumbs up” for your point.

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  8. Graham says:

    Here in British Columbia, Canada we already pay $10.00 (and more) for a six pack of beer and we don’t see any sign of decreasing alcohol abuse.

    One “do-gooder” group recently started a campaign to raise the price of alcoholic beverages even more. It’s premise is that higher prices will somehow mean underage youth will not be able to afford to drink to excess… AS IF! A better choice might be to put some of the government’s obscene liquor profits into programs to teach parents how to instill responsible consumption habits in their children.

    Whether it’s kids or adults with alcohol issues who can’t say, “No thanks, I’ll pass, I fail to see why I should pay ever increasing prices for one of life’s little pleasures because a small minority can’t accept reality unless they see it through blurry eyes.

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