The economic approach to alcohol policy focuses on the external costs of consuming alcohol, not gross costs. It recognises that alcohol provides benefits to consumers and supposes that internalised costs of use borne by non-dependent consumers are irrelevant from society’s viewpoint. This is based on the utilitarian precept that consumers should bear the full costs of their consumption and that, given this, society should maximise net social benefits.
This approach provides a guide to policy design with secure utilitarian foundations. Information should be provided to consumers so they assess consumption costs accurately, including genetic information and self-control problems that can develop. Self-control difficulties can be addressed with appropriate policies for treatment and by adjusting measures of benefits from consumption. With such adjustments, alcohol pricing forces prices of alcohol to full social cost (Godfrey 2004)).
Despite these reasons for adopting the economic approach it has, in fact, been applied only rather seldom. The main studies are for the US — Manning et al. (1989), Pogue & Sgontz (1989), Heien & Pittman (1993) — and New Zealand (Barker (2002). Anderson and Braumberg (2006: 68–9), in reviewing these, comment on the difficulties of implementing them given problems of defining externalities and of recognising the private component of health costs with a public health system:
…externality studies…omit any consideration of the broad range of costs borne by the individual drinker, and are more useful when conducted alongside rather than in place of more common social cost studies. This is particularly true given two contentious results of the assumptions in many externality studies — first, that any harm within the household (such as to the drinker’s partner, or children) is counted as a private cost; and second, that drinkers are both fully rational and fully informed of the risks when they decide to drink.
This criticism rejects the liberal ethic underlying the economic approach. The claim that intra-family harm should be included as a private cost was rejected above because families do not make drinking decisions; individuals do. The argument that groups of non-drinkers can best judge what a consumer should consume is not always correct. Policies can be designed which address the needs of problem drinkers while meeting liberal precepts and standards of economic efficiency for most drinkers. To a liberal, paternalism is a questionable overall basis for public policy.
Finally, it can be questioned whether this analysis applies to illicit substances such as heroin or ‘ice’. A distinctive feature of these substances is that their consumption is socially costly even at low initial levels, suggesting a case for outright prohibition rather than regulation by taxes. With respect to activities such as gambling and food consumption, which can be behaviourally addictive and, in the case of foods, can lead to obesity problems, our analysis has value. Taxes on gambling (Productivity Commission 1999) and ‘fat taxes’ on foods (Jacobson and Brownell 2000) restrict consumption and can be pursued with policies to address self-control issues.