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.