There are three market imperfections that create a case for restricting alcohol consumption, and a fourth, realpolitik, reason: paternalism.
1. Information: Efficiency in market exchange requires that the purchaser of a product understands its characteristics. With respect to alcohol, an issue is whether consumers understand that alcohol is a neurotoxin that destroys brain cells, with few health benefits (Fillmore et al. 2006). It is also unclear whether consumers understand the genetic and neurobiological bases for alcohol self-control problems.
The information difficulties are compounded by private-sector advertising and alcohol promotion which links consumption to sporting and social prowess. There is evidence that such advertising has significant consumption effects, particularly among adolescents, where motivations for risk-taking, novelty-seeking and peer-driven behaviour increase the probability of alcohol experimentation (Saffer and Dave 2003).[3]
Finally, particular age, ethnic and socio-economic groups have poor information. The failure to provide information about the negative consequences of drinking alcohol is a market failure since information is a public good. Markets will develop to promote alcohol consumption since this benefits commercial interest, but there are diminished private incentives to provide information presenting possible negative outcomes.
On the other hand, there is evidence that some young people overestimate risks associated with alcohol consumption — particularly risks of becoming alcoholic. This overestimation leads to less drinking than would occur were risks accurately perceived (Lundborg and Lindgren 2002). The same type of finding has been observed with respect to smoking, where most overestimate risks of adverse health consequences (Viscusi 2002). To the extent that this is true, public-information campaigns that seek accurate perceptions of health costs should, paradoxically, be oriented towards calming fears of risks rather than heightening awareness of them.
2. Self-control issues: Alcohol consumption can be addictive and people may have problems controlling their consumption. Alcoholism is a chronic, relapsing disorder characterised by a preoccupation with obtaining alcohol and a loss of control over consumption. Self-control problems can be triggered by impulsiveness that is, in turn, generated by advertising and other cues. There are particular issues of self-control among youth, who have high impulsiveness, as well as among those with particular genetic predispositions (Goldstein 2001).
3. Externalities: Alcohol consumption creates private costs for individuals and social costs for those who interact with alcohol consumers and the broader community. Drink-driving is the most serious cause of traffic accidents (Phelps 1997), with 28.5 per cent of road deaths of those aged under 65 attributed to alcohol (ABS 2006). Violent behaviour by intoxicated persons is also a serious issue.
Other alcohol-linked externalities include foetal alcohol syndrome and harms caused by drinkers to family members. Some economists ignore intra-family costs on the basis that family units are regarded as making mutual consumption decisions. This is not so with most alcohol consumption, so family costs are best regarded as a third-party impact.
In addition, since Australia has a publicly funded national health scheme the medical costs of alcohol consumption are not only private. Above-average medical costs will be met partly from the public purse, providing a public-interest case for restrictions.
4. Paternalism: Although not a market-failure reason for intervention, there are moral and emotional arguments against excessive alcohol consumption. Some ‘wowsers’ oppose alcohol consumption even if well-informed consumers, without self-control problems, bear all consumption costs.
Paternalism should result in alcohol taxes being set above externality-correcting levels. It motivates public-health campaigns to decrease consumption not because external costs are generated but because reduced consumption is the social objective.
For policy purposes, paternalistic arguments are unhelpful because they do not take one far in developing a rationale for policy. Alcohol consumption is opposed because certain groups in the community — doctors, scientists, religious leaders — assess it to be undesirable. However, considering paternalism as a policy motivation is useful for understanding actual government policies which can be assessed, independently of externalities, purely in terms of how well they restrict consumption.