Leigh on Social Cost

Andrew Leigh weighs in on the Australian alcohol excise tax debates. The anti-alcohol folks have been citing the relatively recent $36 billion alcohol social cost figure; Leigh's comments follow below. But let's have first a quick look at the new cost figure.

At page 7 of the report, they invent, whole-cloth, a new requirement for internalization of intra-family effects: joint ownership of all family resources. Funny enough, I never noticed that part of Becker's Rotten Kid theorem. If Becker could generate intra-family internalization with no such assumption, it hardly seems a necessary condition for internalization of intra-family effects.

I've not gone over their cost estimates with anywhere near the detail I've taken in looking at Collins & Lapsley. Instead, I used my usual approach: find what looks to be one of the biggest cost components and see if it makes any sense. If it doesn't, that probably says something about the quality of the whole report.

And so at Table 9.13, they derive $6.4 billion in intangible harms to the quality of life of those who report knowing heavy drinkers whose drinking has harmed their quality of life. How? They get the average Quality Adjusted Life Year scores for those who report either not knowing a heavy drinker or knowing a drinker whose drinking hasn't negatively affected them, the average QALY score for those reporting knowing a drinker whose drinking has affected them "a little", and the average QALY score for those reporting that a drinker has affected them "a lot". They then monetize the difference under the assumption that knowing a heavy drinker is what's causing the differences in QALY scores.

The problem with this method is that it hopelessly confounds the effects of knowing a nasty drunk with the effects of being in the cohort of people most likely to know a nasty drunk.

Suppose, for argument's sake, that the average person who knows somebody whose heavy drinking has imposed costs on him differs from the average person who doesn't for reasons other than knowing somebody who's a nasty drunk. There are plenty of reasons to expect that such differences might exist. Off the top, I'd be willing to bet that people more likely to be adversely affected by a harmful drunk are also more likely to be unemployed, have lower education, have lower income, and so on. Yes, it's entirely a stereotype to say that these things don't happen in more privileged families - all kinds of bad outcomes happen there too. But it's the averages that matter here. And the kinds of things that give rise to having a social network more likely to include a nasty drunk also, on average, seem rather likely to give rise to other adverse outcomes independently of whether you wind up knowing a nasty drunk. But the report happily takes the whole $6.4 billion monetized difference as being due to alcohol. That's a sixth of the report's total.

Back to Andrew Leigh:

Mr Leigh, the member for Fraser in the ACT, said the consequence of introducing policies to protect people's future selves from their current selves “could actually be bigger than all the other social harms put together”.
“The one thing I'm still puzzled about and could use some assistance on is how much we should be concerned about an alcoholic's damage to their future selves” he told a national alcohol forum sponsored by the Australian Medical Association.
“If we go by standard rational economics, it isn't a social cost if I drink myself to an early death, but I think working through that rigorously, either empirically or theoretically, is useful.”

If we go by standard, rational economics, it isn't a social cost if someone drinks himself to death. Exactly right. Costs to the drinker are internal, not external.

Leigh's also right that setting policy to control internalities - costs individuals may impose on their future selves - could have very broad consequence. Glen Whitman outlined some of the problems here.

Leigh continues:

Mr Leigh, considered a rising talent in Labor ranks and who was representing the government's viewpoint at the conference, said he was frustrated there was not enough evidence to show whether a volumetric tax would work in cutting problem drinking.
And he said a volumetric tax on wine would have social equity consequences because it would hit low income earners the hardest.

This is a problem both for considering changes in the tax mix in Oz, and for discussions of minimum pricing regimes elsewhere. It isn't just the folks looking to get drunk as cheaply as possible who go for lower cost alcoholic beverages; plenty of poorer moderate drinkers go for cask wines too. Any gains from reducing the harms imposed by the drunks would need to be weighed against the consumer surplus losses accruing to moderate drinkers. Both of these need be evaluated at the margin; estimates of total costs aren't entirely helpful with that.