A review of alcohol consumption and alcohol control policies

A review of alcohol consumption

and alcohol control policies

James J. Fogarty

ACIL Tasman, West Perth, Australia and

Business School, University of Western Australia, West Perth, Australia

Abstract

Purpose – The purpose of this paper is to present a review of the literature on alcohol consumption,

the externality cost of alcohol consumption, and the effectiveness of policy options.

Design/methodology/approach – Evidence on the cost to society of alcohol consumption, the

amount of excise tax collected, the demand response of consumers, and the effectiveness of

alcohol-control policies is reviewed.

Findings – Alcohol excise taxes generally, but not everywhere, fail to recover the externality costs

placed on society that arise from alcohol consumption. Where externality costs are greater than excise

revenue higher excise taxes are one effective and appropriate policy response. Complementary policies

to higher excise taxes are likely to include: the provision of more information about harmful effects to

consumers, especially the young; greater enforcement of drunk-driving laws and zero tolerance

drunk-driving laws for young drivers. Restrictions on the opening hours of late night venues may have

a modest impact on reducing costs, while advertising restrictions are unlikely to be effective.

Originality/value – Typically. articles on alcohol consider a single issue. This review paper brings

together information from both the health stream of alcohol studies and the economics stream of

alcohol studies and provides a useful survey and synthesis of the literature.

Keywords Alcoholic drinks, Consumption, Supply and demand

Paper type Literature review

1. Introduction

Alcohol consumption, from beer, to wine, and on to distilled sprits, has long been part

of human life. It is for example thought that by about 3000 BC Egyptian wine making

skills were well developed (Clark and Rand, 2001, p. 8). Recently, alcohol consumption

is widespread, and there are, according to World Health Organisation (WHO)

estimates, some 2 billion alcohol consumers. Although the amount spent on alcoholic

beverages varies significantly, both between and within countries, Selvanathan and

Selvanathan (2005, p. 209) report that on average the people of the world devote

approximately 3.2 percent of their income to alcohol.

The positive health effects of modest alcohol consumption – especially red wine

consumption – have in recent years been widely reported. Yet, high levels of alcohol

consumption, and in particular binge drinking, are associated with a range of negative

health and social outcomes. For example, the WHO (2004, pp. 50-1) estimated that in

2000, 4 percent of all disability adjusted life years lost could be attributed to alcohol.

More generally, heavy alcohol consumption is associated with elevated health and

accident risk, and a range of undesirable social outcomes. High levels of alcohol

consumption, or binge drinking, may therefore result in significant additional costs to

government via the health, legal, and social security systems.

The most appropriate mix of alcohol-control policies will depend on the nature of

the problem. If the externality costs associated with alcohol consumption are largely

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DOI 10.1108/17554210910962503

confined to heavy drinkers, and such drinkers are unresponsive to price changes,

excise tax increases would not be an appropriate policy response. Instead, policies

based around education and information would be most effective. If most of the

externality cost associated with alcohol consumption is associated with road trauma

then it may be that more rigorous enforcement of drunk-driving laws, and more severe

drunk-driving penalties would be an effective policy approach. If demand is sensitive

to advertising, restrictions on advertising may be an effective policy. If much of the

cost is associated with patrons leaving late night venues then it may be that policies

targeting such venues will be effective.

The remainder of the paper is structured as follows. Section 2 sets out an economic

model of consumption and provides a rationale for government policy action. Section 3

presents details on alcohol consumption patterns, the externality costs associated with

alcohol consumption, and the amount of excise revenue collected from alcohol taxes in

different countries. Section 4 reviews the evidence regarding the effectiveness of

different policy approaches, and concluding comments are presented in Section 5.

2. An economic model of alcohol consumption

Before discussing policy relating to alcohol consumption it is necessary to be clear

about the framework that supports the assessments made. Economic studies of alcohol

consumption, starting with the work of Stone (1945), began by treating alcoholic

beverages as ordinary commodities. With such an approach, the implied demand

equation for a particular beverage depends on prices, income, and consumer

preferences. The approach recognised that the full price of alcohol could involve more

than just the immediate money price, but did not recognise the possibility for past

consumption to impact on current consumption decisions. Approaches that recognise

the potential for past consumption of alcohol to impact current alcohol consumption

decisions were then developed. These approaches are now generally referred to in the

literature as myopic addiction models.

Myopic addiction models involve the estimation of demand equations where the

consumption decision depends not only on prices, income, and consumer tastes, but

also on past consumption of alcoholic beverages. The next evolution in the economic

approach involved the introduction of the Becker and Murphy (1988) hypothesis of

rational addiction. Although the title of the hypotheses remains controversial, the

demand equations that arise under the rational addiction hypothesise say that current

consumption depends on prices, income, consumer tastes, past consumption, and

future consumption.

In effect the rational addiction hypothesis says that alcohol consumption in the past,

current alcohol consumption, and future alcohol consumption are all complements in

consumption. It is the linking of consumption through time, rather than an exclusive

focus on past consumption, that distinguished the rational addiction approach from

earlier addiction models. To illustrate the implications of the assumption, consider the

following scenario. Let the government announce an excise tax increase for alcoholic

beverages of 10 percent effective immediately, and a further increase in alcohol excise

taxes of 10 percent in 12 months. The increase in current prices will lower alcohol

consumption today and higher future prices will lower future alcohol consumption.

Under the rational addiction hypothesis future consumption and current consumption

are complements. As such, knowing today that there will be higher prices in the

Review of

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