Australian adults drank on average 9.8 litres of ‘drinking alcohol’ (ethanol) per capita in 2004–05. Some 13.4 per cent drank at ‘risky’ levels, this percentage having grown 50 per cent over the previous 10 years (ABS 2006).^[2] Some drinkers spent substantial resources controlling their drinking: 37 per cent of clients seeking treatment for drug dependency saw alcohol as the primary drug of concern (AIHW 2006). Finally, alcohol is (after tobacco) the second-largest cause of drug-related hospital admissions and the main cause of deaths on roads (ABS 2006).

This paper examines policy interventions in alcoholic-drink markets from an economic perspective. This approach rejects the paternalism which opposes drinking alcohol because of claimed high gross costs. Instead, it assumes that alcohol yields consumption benefits (in taste and effects) as well as costs, and that society’s utilitarian objective is to maximise the excess of its benefits over its costs.

Consuming alcohol, then, is viewed for the most part, as a social, recreational activity — a social lubricant that enhances the enjoyment of life. For most, using alcohol is an informed, rational choice with relatively harmless implications — a perspective not typically adopted by medical and public-health researchers.

The analysis recognises, however, that alcohol consumption has important costs, particularly when consumed at high levels or in risky settings. Consumption can have harmful physical and mental health effects and can lead to anti-social, dangerous behaviour such as drink-driving and violence, particularly within the family. These costs become important to an economic liberal when they are not borne by individual consumers or when there are issues of information failure or failure of self-control.

But from an economics perspective even substantial harm caused by alcohol consumption does not, by itself, suggest alcohol use should be restricted. The presumption is that usually individuals are the best judges of their own welfare. Thus, provided the potential for harm is recognised by users, and harms are borne by users who assess them rationally by comparing benefits to costs at the margin, restrictions are redundant. The presumption is that alcohol consumption provides net benefits to most adults who make informed individual choices.

This paper provides a framework that can assess the government policies have been devised to regulate the terms under which alcohol is consumed. Medical and non-economic approaches are examined and then reasons for intervention provided. Information, self-control and externality-based policies are discussed, before final remarks are made.