Dr Eric Crampton (Economics and Finance) released a paper at the Australian Conference of Economists in Canberra which exposed flaws in the methods used in a 2008 report that suggested the annual cost of alcohol to the Australian economy was more than A$15 billion.
His research, called “The Cost of Cost Studies”, found that at least 75 per cent of this figure would be dismissed if the 2008 researchers had used mainstream economic method.
Dr Crampton worked on the report with Matt Burgess from the New Zealand Institute for the Study of Competition and Regulation in Wellington, and Brad Taylor from the Australian National University. It was commissioned by the Australian National Alcohol Beverage Industries Council (NABIC) through a grant administered by UC’s Research & Innovation Office and the College of Business and Economics.
Dr Crampton’s team analysed a 2008 report by Australian academics David Collins and Helen Lapsley, published by the Australian Department of Health and Ageing, that estimated the costs of tobacco, alcohol and illicit drug abuse to Australian society in the 2004/2005 period.
Collins and Lapsley used a “Cost of Illness” approach which Dr Crampton described as “fundamentally different from mainstream economic method. It presents costs drinkers impose upon themselves, like personal alcohol expenditures, as being of social consequence”.
Economic measures of policy-relevant social cost typically include only costs imposed externally, or consider both private benefits and private costs.
“Private costs have no policy consequences where there are offsetting private benefits, but Collins and Lapsley assume away most private benefits. So, the $15 billion cost they estimate has no policy relevance,” he said.
“This $15 billion figure has been used by politicians and authorities to suggest increased taxation yet most of the costs included in this figure, like $1.7 billion that drinkers spend on their own liquor, are privately borne.
“The externally imposed portion of alcohol’s social cost is less than $4 billion and that is in line with the tax take from the sale of alcohol.”
Dr Crampton said private costs incorporated in the Collins and Lapsley research included consumer spending on alcohol, private medical expenses incurred by alcoholics, the lost wages of those who miss work due to alcohol consumption and privately incurred accident costs.
“The reported social cost of any activity can be made arbitrarily large if we’re happy to include private spending as social cost. It’s just then no longer policy-relevant.”
NABIC approached Dr Crampton to undertake the work after the organisation saw a similar analysis he and Mr Burgess did of the 2009 BERL (Business and Economics Research Limited) report, which was commissioned by New Zealand’s Ministry of Health and ACC to look into the social costs of drugs and alcohol in New Zealand.
The BERL report estimated the social cost of alcohol to New Zealand was $4.8 billion and was cited extensively in the Law Commission’s review of alcohol. However, Dr Crampton and Mr Burgess, in a report titled “The price of everything, the value of nothing: A (truly) external review of BERL’s study of harmful alcohol and drug use”, found that the Cost of Illness method used in the BERL report inflated the cost of alcohol.
For more information please contact:
Dr Eric Crampton
Economics and Finance
College of Business and Economics
University of Canterbury