Taxing to Control Social Costs: The Case of Alcohol

Abstract

Whether taxation of alcoholic beverages is an appropriate means of reducing social costs of alcohol consumption is continuing public policy issue. Some argue that public health costs and other external costs associated with the consumption of alcoholic beverages are so significant as to justify substantial excise taxes on those beverages.' Others counter that a tax on alcohol would reduce consumption indiscriminately... and therefore reduce the satisfaction experienced by millions of sensible drinkers without necessarily reducing the harm caused by few excessive drinkers. 2 This paper presents and applies framework for evaluating these two views of the efficiency (welfare) effects of alcohol taxes. Determining the efficiency implications of alcohol taxes is complicated by the question of whether and how much abusers, especially alcoholics, benefit from alcohol consumption. Standard welfare theory assumes that all consumers of alcohol enjoy positive net benefits (consumer surplus). However, it is possible that alcoholics over-consume in the sense that consumer surplus from their