Tag: externalities

The DUI Externality

In January, I published “How ‘Market Failure’ Arguments Lead to Misguided Policy.” One major criticism I had of the way “externalities” are talked about in public debate was policymakers ignoring that supposed “corrections” for these “market failures” could induce behaviors with their own external costs.

Consider a bill proposed in the Oklahoma house by Rep. Merleyn Bell (D-Norman).

She is concerned about the costs emanating from driving under the influence (DUI) of alcohol. She wants to raise funds to subsidize deterrents, such as stop-checks on roadways. But rather than raise alcohol taxes, which would affect all consumers, she wants to “price in” the externality by imposing costs on those travelling at times when people are more likely to drink. The way she suggests doing so is baffling, however: adding a 20 percent supplement to rideshare surge pricing for companies such as Uber and Lift. Surge pricing, of course, tends to occur at weekends and after sports events and concerts.

Now, it doesn’t take a genius to work out a big problem here.

Raising the price of using ride-share services will reduce the quantity of ride-share services demanded. On the margin, that probably means fewer ride-share drivers themselves under the influence of alcohol. But I suspect those whose livelihoods depend on driving are among the least likely to DUI in the first place.

No, the overwhelming effect of raising rideshare surge prices will be to deter consumers from using those services. That means those who’ve been out drinking for the weekend will be more likely to drive themselves home or get in the car of someone else who has been drinking, increasing the risk of DUI-related costs and negating any deterrent from the spot-checks.

The Case for Economics When Considering Alcohol Tax Levels

“It’s time to raise the alcohol tax,” declared Vox author German Lopez back in December.

Now let me state upfront that I am not confident I know what the correct tax rate on alcohol should be. Lopez may well be right about their being a rational case on economic grounds for an increase based on high-quality, robust analysis. But his article does not make a reasoned case satisfactorily, nor does it link to such analysis.

In fact, it came to my attention as I was finalizing my new paper “How Market Failure Arguments Lead to Misguided Policy” (released today). And I’m convinced his piece is a classic of the genre. This article aims to highlight some of the key objections I have to his approach, which is increasingly common in public debate.

The traditional economic case for alcohol taxation

Libertarian theory aside, the classic case for taxing alcohol will be familiar to those with basic economic knowledge. Alcohol consumption is believed to impose, on net, external costs on people other than drinkers themselves.

When deciding whether to drink, individuals are thought to only consider the balance of private costs (the money it costs to drink, the hangover, the risk of disease or accidents for them etc) and the private benefits of consumption (the confidence, the enjoyment of the taste, the benefits to them of socializing etc).

But clearly, alcohol consumption can have external effects. The costs of alcohol-related crime and driving under the influence are borne by others. There may be net external costs relating to health care, too, given alcohol-related diseases and incidents could necessitate higher taxpayer subsidies or insurance premiums (though, applying such logic consistently, one would have to net off any “savings” that alcohol consumption might deliver in terms of lower Social Security and Medicare payments from reduced longevity).

The economic case for a tax then is this: if we observe net external costs associated with alcohol consumption, then allowing a free market would lead to higher levels of consumption than optimal. If a tax can be imposed that equates roughly to the marginal external costs of consumption, then drinkers are faced with a price reflective of the true costs of their actions.

Due to the “Law of Demand,” the amount of alcohol consumption will fall to the level at which marginal social costs equate to marginal benefits as this tax is imposed. Some of the negative external costs will occur less often, as will some of the private costs. Society as a whole will be better off because the tax means prices now reflect the true cost to society of the product’s consumption.

In order to make the case for a hike in alcohol taxes then, Lopez simply needed to present clear evidence that current tax rates on alcohol are too low to account fully for the external costs of consumption we see. His line of reasoning does not make this case.

Against A Highly Regressive “Meat Tax”

Some economists want to make it more expensive for the less well-off to enjoy a clear revealed pleasure: eating red and processed meat.

The average household in the poorest fifth of the income distribution dedicates 1.3 percent of spending towards it. That’s over double average household spending in the richest quintile. Yet meat is now a new “public health” target. Once, lifestyle controls stopped at smoking and drinking. They recently expanded to soda and even caffeine. Now, even the hallowed steak is not sacred.

Last week, a report by University of Oxford academics calculated supposedly “optimal tax rates” on red meat (lamb, beef and pork) and processed meats (sausages, bacon, salami etc.) For the U.S., the recommend rates were as high as 34 percent and 163 percent, respectively. Such taxes, the report claims, could save 52,500 American lives per year.

To an economist, this approach might make theoretical sense. If the World Health Organization is right that eating meat increases risk of heart disease, cancer, stroke and diabetes (in some cases, very much disputed claims), then consumption could increase healthcare costs. Some of these costs will be borne by others, through higher government spending or healthcare premiums. Imposing a tax equal to the true external costs of the next steak, lamb chop or burger patty one eats forces consumers to face the full social costs of their eating decisions. In turn, then, the tax will somewhat reduce consumption to a supposed “optimal” level.

Yet, in reality, the presence of external effects is no slam-dunk to justify taxes. One must also consider costs, unintended consequences and the ability of government to assess risk and harm accurately. In these areas, the meat tax advocates appear off-base. The result is their proposed tax rates look way too high, even in theory, and it’s doubtful they are the best means of improving economic welfare.

First, the methodology appears to add up healthcare costs from extra meat consumption as if they are all costs imposed on others. But at least part of extra healthcare or medication costs of meat-eaters affected by disease would be personally financed, rather than funded through higher insurance premiums, or Medicaid or Medicare spending.