ECON 369

In Class Exercise –  Please Do This is a Group - Results to be presented to the class

Are Higher Alcohol Taxes Justified?  (from a public policy analysis by Dale M. Heien, The CATO Journal, Vol. 15, No. 2-3)

Or – the real world problems with trying to internalize an externality.

Introduction:  One of the justifications for excise taxes on alcohol is that the consumption of it causes negative externalities – therefore, the tax is used to “internalize” the negative externality – lowering consumption and the negative externality.

The conclusion of an article by Heien reads:

Conclusion:

Recent articles by some economists have called for increased taxation of alcoholic beverages. The evidence presented here indicates that the net external costs of alcohol do not exceed the current level of taxation. Much like the case for the taxation of tobacco (Viscusi 1994), the rationale for a tax increase on alcohol does not pass the social-cost test when all costs, including those imposed on moderate drinkers, are juxtaposed against the current levels of taxation.

Assume the following Information Your Group Might Use:

Table 1

TYPES OF FATALITIES IN FATAL CRASHES INVOLVING AT LEAST ONE INTOXICATED DRIVER OR NONOCCUPANT: 

Also:  There is a U-shaped relationship between alcohol consumption and health problems (i.e., put health problems on your vertical axis and alcohol consumption on year horizontal axis).

Answer the following questions and then come to your own conclusion:

What are the Negative Externalities Created by Consuming Alcohol (be careful about who you include here as undergoing a negative externality due to someone consuming alcohol):

But are there also positive externalities?

Note:  A major problem, according to Heien, is that there are also positive externalities created by consuming alcohol – and not everyone creates the negative externalities, yet everyone who buys alcohol pays the tax. 

What are the Positive Externalities Created by Consuming Alcohol:

How would you attempt to measure these externalities in order to determine the “most efficient” consumption tax?

So – is there a net negative or positive externality on net?   If you were a "public official" - would you call for higher or lower taxes or none at all (on alcohol).  Justify your position.