Wednesday, June 23, 2010

What would the accurate pigouvian tax be for alcohol consumption?

Erric Morris at the Freaknomics blog ponders:

In 1996, Donald S. Kenkel estimated that taxes would have to quadruple. Or, to think of it another way, taxes should about equal the price of the drink itself. Very roughly, this would hike the cost of a six pack of one of the mass-produced American beers from about $6.00 to about $10.00.

This four dollars includes merely the societal effect, i.e., the externality:

Many use alcohol responsibly, but one study found that thanks to DUI accidents, crime (impacts on victims, costs of policing, and costs of incarceration), shortened lifespans, medical and psychological care for drinkers, and impaired productivity, the total cost of alcohol abuse approaches $700 per American per year (about $860 in today’s dollars).

Who’s getting stuck with the tab? A large portion of the total cost falls on the drinkers themselves, which might reasonably be considered to be their own business. But much of the burden is also borne by drinkers’ families and friends, and by society as a whole.

Rather than merely considering it their own business, as we've discussed previously, it may be possible to incorporate our own "internalities" into the cost, i.e., raise the price of the product to adjust for our cognitive bias in evaluating our own futures and risks.

One author avaluated the effect of DUIs in proportion to societal effects of alcohol as a whole:

Kenkel estimated that if we could magically do away with DUI, we should still optimally raise taxes on alcohol (due to liquor’s other deleterious effects), but that the increase should only be about a dollar a six pack and not four dollars.

In fact, as previously mentioned, drunk driving crashes can be associated also with the cost of gasoline. It would be interesting to evaluate how these two prices, gas and alcohol, could synergistically conflate to reduce drunk driving. Which price has a greater impact on our cognitive biases? Do we tend to fill our tank before or after we've impaired our judgement?

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