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| Journal of the New Zealand Medical Association,
24-August-2012, Vol 125 No 1360
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What’s in a cost? Comparing economic and public
health measures of alcohol’s social costs
Eric Crampton, Matt Burgess, Brad Taylor
While all forms of consumption bring both costs and
benefits, not all such costs and benefits are socially relevant. Because we
expect individuals to discount costs borne by others, consumption of products
that can have negative health consequences and that thereby impose costs via the
public health system may also require excise taxes to force the internalisation
of these otherwise externalised costs.
Measuring correctly the costs that individuals impose on
external parties is an important first step in ensuring that tax and regulatory
policy is set correctly. Unfortunately, adequate assessment of such costs is the
exception rather than the rule.
We here summarise findings from our
work1 comparing the social cost estimation
method used in the public health literature with that used in the economic
literature. We find the former suffers from a cost-inflating bias. Not only are
social costs and private costs conflated, but, in important cases, categories of
cost are double-counted.
As exemplar, we analyse studies finding social costs of
alcohol in New Zealand of $4.8 billion2 and of
$15 billion in Australia,3 finding that only a
fifth of those figures could plausibly be counted as an upper bound measure of
actual external, policy-relevant, social cost. Nevertheless, the figures have
been influential in policy debate.
While we do not wish to diminish the very real harms of
alcohol use, it remains important that policy be based on sound measures that
are comparable across different cost areas.
The economic framework for cost analysis allows us to
compare the otherwise incommensurable. Stepping too far from that method
prevents derived results from being useful for policy purposes and instead
generates figures more suited to advocacy.
We illustrate the difference between the economic method and
the public health method as we work through categories of cost found in these
two influential policy reports. We begin with those tabulated costs that are
best viewed as policy-relevant from an economic perspective and then move
towards those that are generally inadmissible in an economic analysis. We then
discuss the critical difference between marginal and total costs in economic
analysis and its relevance for policy.
Policy-relevant costsCrime and motor-vehicle accidentsSome drinkers go on to commit crimes, or to cause car
accidents, that would not have occurred but for intoxication; these costs are
imposed by drinkers on others, are significant in magnitude, and
policy-relevant. Where the economic method and the public health method diverge
is in determination of causality in crime and in setting the boundaries of which
costs are policy-relevant among those suffering costs of drink driving
accidents.
Both Business and Economic Research Limited (BERL) and
Collins & Lapsley (CL) use survey methods to assign the proportion of crime
attributable to alcohol. In the New Zealand case, BERL used an existing survey
of prisoners who were asked to reveal the extent to which alcohol contributed to
their current incarceration. Those answering “some”, “a
lot”, or “all” were deemed to have committed a crime that
would not have been committed in the absence of alcohol. Positive responses were
sorted by category of crime, and that proportion of each crime’s aggregate
cost was attributed to alcohol.
CL used two separate pre-existing
surveys.4,5 Police detainees indicating that
they had consumed five or more standard drinks any time in the prior month
(three or more for women) and that they had consumed any alcohol at all in the
48-hours prior to detention were deemed to have committed an alcohol-caused
crime if they also revealed alcohol dependence through positive answers to three
of six indicator questions.
A husband and wife who shared a bottle of wine with dinner
the day before committing a jewellery heist, and who indicated signs of alcohol
dependence in survey questions, would be deemed to have committed an
alcohol-caused crime. Costs of imprisonment are apportioned through use of
prisoner self-reports of intoxication at the time of committing the offence.
Neither method is adequate for assessing alcohol’s
causal role in crime. Prisoner self-report of intoxication may be viewed as
exculpatory if subsequently attending alcohol treatment programmes helps earn
early release. In our review of BERL, we downgraded their assessed crime costs
by a third to remove those answering “some” to the survey question;
in our review of CL, we noted the grave problems with their estimate but did not
adjust their figure other than by removing costs attributed to forgone prisoner
earnings.
Similarly, costs imposed on others by drink drivers should
be tabulated in any economic accounting of the costs of alcohol use. But the
public health method diverges from the economic method in determining which
costs count.
Consider first the case of a drink driver who dies in a
single-vehicle accident in his own car on a little-used road without incidental
property damage to others. The public health approach counts as socially
relevant the mortality costs falling on the drinker himself and the damage to
the drinker’s car; in an economic framework, the only policy-relevant
costs are those imposed on emergency services in responding to the
accident.
Private and external costWhy do the two methods so diverge? Economists are not so
amoral as to consider it irrelevant that someone has tragically died. But
measures of private costs borne by drink drivers are only economically
meaningful if offset by the consumption benefits enjoyed by all drinkers who
took similar risk and did not have an accident.
Consider, by analogy, skiing, which would be utterly
socially wasteful if we counted all of the accident costs suffered by skiers
while taking no consideration of that all skiers derive at least some enjoyment
from their risky activity. And here, from an economic perspective, the public
health literature goes seriously awry.6
BERL simply assumes that harmful drinkers enjoy no benefits
from their consumption;7 they consequently deem
all private costs as socially relevant because there are no offsetting private
benefits. CL take a rhetorically different but substantially equivalent approach
by assuming any potential market failure in alcohol consumption sufficient
reason for dismissing all private consumption
benefits.8
Market failures such as imperfect information can result in
excess consumption, and the excess of costs over benefits for the erroneously
consumed alcohol can then count as social, but simply assuming away all private
benefits because of the potential for market failure is completely at odds with
standard economic method. We could similarly assume that imperfect information
in the used car market means nobody derives any benefit from buying a
vehicle.
This substantial difference results in the biggest
divergence between the public health and the economic approach to tabulating the
costs of alcohol use. Where public health figures include all of the costs
drinkers impose upon themselves, the economic method would either leave those
costs to the side or incorporate them only if offsetting private benefits were
simultaneously estimated and included.
Drink-driving costs falling upon those external to the
vehicle should be counted as policy-relevant from both an economic and a public
health perspective. From an economic perspective, costs falling upon the driver
should be deemed private and irrelevant for policy unless weight is given to
benefits enjoyed by the set of drivers taking similar risk but who suffer no
adverse outcome.
Whether those inside the vehicle with the drinker bear
public or private costs is less clear. A strict interpretation of the economic
approach would hold that passengers’ agreement to ride with an intoxicated
driver makes them party to the driver’s decision; resultant costs or
benefits they bear can then hardly be deemed
external.9 If we wished to take a less strict
line, we would again wish to count the benefits enjoyed by the passengers of
drink drivers who do not suffer accidents against the costs falling on those who
do.
It is easy to scoff at the potential existence of such
benefits, but it puts a heavy thumb on the scale if we simply assume them away.
In any case, the mortality costs of drink driving accidents falling on those
inside the drinker’s vehicle other than the driver are a small proportion
of overall tabulated mortality costs.
Health care costsIn a strict economic framework, the majority of
alcohol-related costs borne by the public health system would be considered a
transfer rather than as a true economic cost; only the identity of the payer
changes rather than the existence of the cost.
If health care costs fell privately, it is likely that
drinkers would take more care in avoiding such
costs;10 the increase of net costs under a
public health system as compared to a private system can be considered a real
external cost of alcohol use, though whether it should be tallied as a
consequence of alcohol consumption or as a consequence of a policy decision that
the tax system should be used to defray the health costs of drinking is, at
best, debatable.11
We assumed that policy’s intention is to offset
transfer costs with excise taxes and so included all of these transfer costs as
policy relevant.
CL assessed health care costs through alcohol-attributable
aetiological fractions applied to total medical and hospital expenditures in
Australia. For some disorders, costs to the public health system are reduced
because of alcohol consumption – the burden of heart disease is lessened
by alcohol consumption while the system bears greater costs of cirrhosis. While
we questioned some of their fractions, our report excised only that portion of
health care expenditures borne privately by drinkers using private health
care.
BERL’s method began with CL’s aetiological
tables, but set equal to zero any disorder’s fraction where CL had
determined that alcohol reduced rather than increased health costs; BERL assumed
that harmful drinking, by definition, cannot improve outcomes on any health
dimension. This is clearly out of step with the bulk of the epidemiological
literature that finds, in particular, reductions in coronary heart disease even
among heavy drinkers.12
Overall mortality is certainly increased by heavy drinking,
but the net effect is smaller than BERL estimates. We were unable to
reverse-engineer BERL’s figures to impose CL’s fractions; we instead
deducted only that portion of the health care bill paid privately by the
drinker.
Productivity and absenteeismIf a drinker dies early, he is no longer earning income or
producing output. Economists typically find that workers are roughly paid their
incremental contribution to the firm’s bottom line—their marginal
product. In that case, the only economically relevant productivity cost that
results is the search cost borne by his employer in finding a replacement. If
the death is unanticipated, that search cost is policy relevant. If the
employee’s heavy alcohol consumption were well known, these cost risks
would be already factored into the employee’s pay.
Similarly, most taxpayers contribute less than their service
cost to the government under progressive taxation regimes where high income
earners pay the greatest portion of the cost of government
services.13 Any forgone tax revenue then needs
to be weighed against reduced government liability for superannuation and other
benefits that impose cost at the margin. By way of example, the alcoholic who
dies prematurely neither contributes tax revenues nor consumes subsidised
rest-home care.
Forgone wages plus employer hiring costs then constitute an
upper bound on gross productivity losses consequent to premature mortality;
policy relevant costs will be those borne unexpectedly by the employer. Both
BERL and CL instead effectively take per capita Gross Domestic Product as
measure of forgone production – a figure much larger than the aggregate
wage bill as GDP includes payments to capital. The difference is
substantial—BERL adds over $650 million to headline costs by using per
capita GDP rather than wages.
There are three substantial problems with this approach:
We
consequently made very large adjustments to estimated social costs of
productivity losses and absenteeism.
Intangible costsPremature death is costly; people value their own lives.
Pain and suffering associated with alcohol-related disability and disease are
real. Intangible costs falling on the victims of alcohol-caused crime and the
victims of drink drivers should be tallied in an economic measure of
alcohol’s social cost, but costs borne by the drinker can be included only
if taken net of private benefits; estimating those private benefits would be a
significant task.
We consequently followed the standard economic approach of
excluding privately-borne costs. But both reports suffer from an additional
substantial problem: private costs are significantly overestimated by inclusion
of both intangible costs of life lost and forgone productivity.
Value of statistical life estimates used by both CL and BERL
are inclusive figures; they do not provide a value of statistical life net of
productivity. CL use Australian Bureau of Transport Economics figures on the
Value of a Statistical Life (VSL) based on willingness to pay for incremental
safety improvements. That measure weighs all of the benefits from lives saved by
those safety initiatives. Adding wages to the VSL measure then is
double-counting.
BERL uses New Zealand Ministry of Transport figures that
similarly are inclusive of productivity losses with premature mortality. Indeed,
the Ministry of Transport tabulation of the cost of road accidents excludes
forgone earnings among those killed in road accidents for precisely this
reason.15
BERL therefore
double-counts.16 BERL counts $1.52 billion (CL:
$4.5 billion) in intangible costs of lives lost and $1.5 billion (CL: $3.5
billion) in forgone production, but a substantial portion of the latter is
included in the former. It makes little difference to the bottom line in an
economic costing as both types of cost are largely excluded as borne by the
drinker, but it does matter if we wish an accurate assessment of costs borne
privately by drinkers.
Resources used in abusive consumptionIs it a social cost that a drinker spends $10 on a bottle of
wine? Both BERL and CL deem drinkers’ expenditures on alcohol to be a
social cost. This constitutes a sixth of CL’s headline social cost figure,
and fifteen percent of BERL’s, but none of it is admissible in an economic
measure of social cost. The counting of such expenditure as social cost is a
curious by-product of assuming all private benefits away.
Summing upConsidering only policy-relevant costs reduced measured
social cost substantially. Some $967 million of BERL’s $4.8 billion could
be considered external and policy-relevant as a first cut, though we note
substantial problems remain uncorrected, including overestimation of health care
costs through their adjustment to CL’s aetiological tables.
In CL’s case, some $3.8 billion of their $15 billion
can be considered potentially external, though we also note grave uncorrected
problems in assessment of causality in the crime. Both figures are close to
collected aggregate alcohol excise tax takes.
Margins and averagesIn his address to the New Zealand Police, Sir Geoffrey
Palmer17 contrasted BERL’s measured
social cost of alcohol with the aggregate excise tax take and took the
difference as sufficient justification for large increases in taxation and
regulation. Even leaving aside that the difference between the two figures drops
considerably when normal economic method is applied to BERL’s figure,
differences between aggregate social cost and the excise tax take do not
necessarily inform discussion of appropriate tax and regulation. Rather, we need
to assess the marginal effect of a tax increase.
Alcohol excise taxation is necessarily linear in alcohol
consumption while external costs are more plausibly J-shaped; when aggregate
excise taxes entirely offset external harms, they necessarily impose too great a
cost on moderate drinkers and too small a cost on harmful
drinkers.18 Policy then must weigh the costs
imposed on moderate drinkers against the harms avoided when heavy drinkers
curtail consumption.
By the best existing
estimates,19 a 10% increase in the price of
alcohol induces heavy drinkers to curb their use by only 2.8% while cutting
average consumption by 4.4%. If benefits to moderate drinkers matter, then we
can do net harm by increasing excise taxes if the cost imposed on moderate
drinkers, multiplied by the large number of moderate drinkers, exceeds the
aggregate harm avoided by the smaller reduction in heavy drinkers’
consumption. Measures targeting heavy drinkers might be preferred on economic
grounds, though any measure would need evaluating on its own merits at the
margin.
In short, differences between aggregate social cost and the
aggregate excise tax take tell us little about whether alcohol taxation or
regulation is too strong or too liberal. Instead, we need to assess whether net
marginal harm is reduced by any new measure, while taking seriously the burden
those measures impose on drinkers who do not cause harm. And, ideally, we would
attempt to devise policy instruments that curtail harms imposed by heavy
drinkers at lowest collateral cost to moderate drinkers.
ConclusionIt is easy to generate arbitrarily large figures purporting
to tabulate the social costs of any activity if we use a method that never
counts benefits while counting all of the costs, and some of those costs twice.
While the resulting figure is useful for generating headlines that spur voter
demands for action, it otherwise does little to inform policy development.
Competing interests: The underlying
study was funded by NABIC (National Alcohol Beverage Industries Council) through
a grant administered by the Research & Innovation Office and the College of
Business and Economics at the University of Canterbury. This funding source is
also disclosed in the first footnote of the paper. Very strict controls were
employed to ensure academic freedom in the conduct of the study, and the only
pressure we've been under has been to complete the paper subsequent to
earthquake-induced delays.
Author information: Eric Crampton, Senior
Lecturer, Economics, University of Canterbury, Christchurch, New Zealand; Matt
Burgess, Research Associate, Institute for the Study of Competition and
Regulation, Victoria University, Wellington, New Zealand; Brad Taylor, PhD
Student, School of Politics & International Relations, Australian National
University, Canberra, Australia
Correspondence: Dr Eric Crampton,
Department of Economics, University of Canterbury, Private Bag 4800,
Christchurch 8140, New Zealand. Email: eric.crampton@canterbury.ac.nz
References and footnotes:
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