A Review of Alcohol Consumption

8/8/2019 A Review of Alcohol Consumption

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A review of alcohol consumptionand alcohol control policies

James J. FogartyACIL Tasman, West Perth, Australia and

Business School, University of Western Australia, West Perth, Australia

Abstract

Purpose The purpose of this paper is to present a review of the literature on alcohol consumption,the externality cost of alcohol consumption, and the effectiveness of policy options.

Design/methodology/approach Evidence on the cost to society of alcohol consumption, theamount of excise tax collected, the demand response of consumers, and the effectiveness ofalcohol-control policies is reviewed.

Findings Alcohol excise taxes generally, but not everywhere, fail to recover the externality costs

placed on society that arise from alcohol consumption. Where externality costs are greater than exciserevenue higher excise taxes are one effective and appropriate policy response. Complementary policiesto higher excise taxes are likely to include: the provision of more information about harmful effects toconsumers, especially the young; greater enforcement of drunk-driving laws and zero tolerancedrunk-driving laws for young drivers. Restrictions on the opening hours of late night venues may havea modest impact on reducing costs, while advertising restrictions are unlikely to be effective.

Originality/value Typically. articles on alcohol consider a single issue. This review paper bringstogether information from both the health stream of alcohol studies and the economics stream ofalcohol studies and provides a useful survey and synthesis of the literature.

Keywords Alcoholic drinks, Consumption, Supply and demand

Paper type Literature review

1. IntroductionAlcohol consumption, from beer, to wine, and on to distilled sprits, has long been partof human life. It is for example thought that by about 3000 BC Egyptian wine makingskills were well developed (Clark and Rand, 2001, p. 8). Recently, alcohol consumptionis widespread, and there are, according to World Health Organisation (WHO)estimates, some 2 billion alcohol consumers. Although the amount spent on alcoholicbeverages varies significantly, both between and within countries, Selvanathan andSelvanathan (2005, p. 209) report that on average the people of the world devoteapproximately 3.2 percent of their income to alcohol.

The positive health effects of modest alcohol consumption especially red wineconsumption have in recent years been widely reported. Yet, high levels of alcoholconsumption, and in particular binge drinking, are associated with a range of negative

health and social outcomes. For example, the WHO (2004, pp. 50-1) estimated that in2000, 4 percent of all disability adjusted life years lost could be attributed to alcohol.More generally, heavy alcohol consumption is associated with elevated health andaccident risk, and a range of undesirable social outcomes. High levels of alcoholconsumption, or binge drinking, may therefore result in significant additional costs togovernment via the health, legal, and social security systems.

The most appropriate mix of alcohol-control policies will depend on the nature ofthe problem. If the externality costs associated with alcohol consumption are largely

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confined to heavy drinkers, and such drinkers are unresponsive to price changes,excise tax increases would not be an appropriate policy response. Instead, policiesbased around education and information would be most effective. If most of theexternality cost associated with alcohol consumption is associated with road trauma

then it may be that more rigorous enforcement of drunk-driving laws, and more severedrunk-driving penalties would be an effective policy approach. If demand is sensitiveto advertising, restrictions on advertising may be an effective policy. If much of thecost is associated with patrons leaving late night venues then it may be that policiestargeting such venues will be effective.

The remainder of the paper is structured as follows. Section 2 sets out an economicmodel of consumption and provides a rationale for government policy action. Section 3presents details on alcohol consumption patterns, the externality costs associated withalcohol consumption, and the amount of excise revenue collected from alcohol taxes indifferent countries. Section 4 reviews the evidence regarding the effectiveness ofdifferent policy approaches, and concluding comments are presented in Section 5.

2. An economic model of alcohol consumptionBefore discussing policy relating to alcohol consumption it is necessary to be clearabout the framework that supports the assessments made. Economic studies of alcoholconsumption, starting with the work of Stone (1945), began by treating alcoholicbeverages as ordinary commodities. With such an approach, the implied demandequation for a particular beverage depends on prices, income, and consumerpreferences. The approach recognised that the full price of alcohol could involve morethan just the immediate money price, but did not recognise the possibility for pastconsumption to impact on current consumption decisions. Approaches that recognisethe potential for past consumption of alcohol to impact current alcohol consumptiondecisions were then developed. These approaches are now generally referred to in the

literature as myopic addiction models.Myopic addiction models involve the estimation of demand equations where the

consumption decision depends not only on prices, income, and consumer tastes, butalso on past consumption of alcoholic beverages. The next evolution in the economicapproach involved the introduction of the Becker and Murphy (1988) hypothesis ofrational addiction. Although the title of the hypotheses remains controversial, thedemand equations that arise under the rational addiction hypothesise say that currentconsumption depends on prices, income, consumer tastes, past consumption, andfuture consumption.

In effect the rational addiction hypothesis says that alcohol consumption in the past,current alcohol consumption, and future alcohol consumption are all complements inconsumption. It is the linking of consumption through time, rather than an exclusive

focus on past consumption, that distinguished the rational addiction approach fromearlier addiction models. To illustrate the implications of the assumption, consider thefollowing scenario. Let the government announce an excise tax increase for alcoholicbeverages of 10 percent effective immediately, and a further increase in alcohol excisetaxes of 10 percent in 12 months. The increase in current prices will lower alcoholconsumption today and higher future prices will lower future alcohol consumption.Under the rational addiction hypothesis future consumption and current consumptionare complements. As such, knowing today that there will be higher prices in the

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future implies that the fall in consumption today will be greater than it would be ifonly the immediate excise tax increase was announced. In the rational addictionframework announcing details of future policy direction can have an impact onconsumption today.

Importantly, the rational addiction hypothesis does not say that addicts arenecessarily happier being addicted. Addictive goods are characterised by:

. reinforcement, which implies past use will raise the marginal utility of currentconsumption;

. tolerance, which implies that higher consumption in the past will lower the levelof satisfaction gained from a given unit of consumption in the current period; and

. withdrawal, which involves substantial temporary negative effects forconsumers that stop using the good.

For the rational addict, the positive effect from an increase in consumption todaymust be greater than the negative effect of higher consumption in the future. As

such, the value placed on future happiness can play an important role in theconsumption decision. Under the rational addiction hypothesis, if a person places a lowvalue on future happiness the person is both more likely to become addicted and tostay addicted.

The value a person places on the future is captured by the discount rate or discountfactor. In this context, the discount factor is what converts future happiness values intopresent value happiness equivalent units. A stylised numerical example adapted fromSkog (1999) helps illustrate the role of the discount factor in decision making. Letoverall consumer satisfaction be measured by utility, and let the level of utility withno consumption of the addictive good at a given point in time be 100 units. Letconsumption of the addictive good increase utility to 120 units in the first period of

consumption, but reflecting the impact of tolerance and other long-term negativeimpacts let utility fall to 90 in every subsequent period. Further, if the consumer stopsconsuming the addictive good let them suffer withdrawal in the period they give up useof the good. Specifically, let utility fall to 70 in the period the consumer stops using thegood. Withdrawal is however temporary, and so after one period of withdrawal utilityincreases back to 100 units for each subsequent period.

For a consumer that is focused on the future and so has a discount factor of say0.9, we find that the present value of utility from not consuming 100 100 0:9 100 0:9 0:9 1; 000 is greater than the present value of utility followingconsumption 120 90 0:9 90 0:9 0:9 930 and so the consumerdoes not start consuming the addictive good. If for some reason the consumer foundthey were already consuming the addictive good they would also find that they are

better off to stop using the good.Having started consuming, if the consumer were to stop consuming, the present

value of utility would be 70 100 0:9 100 0:9 0:9 970; whichcompares favourably to the present value of utility from continuing to consume90 90 0:9 90 0:9 0:9 900: The consumer focused on theirlong-term happiness would realise that it is in their best interest to stop consuming,suffer the immediate negative consequences, and then enjoy higher levels of happinessin future periods.

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The opposite is true for the consumer that places a low-value on the future and sohas a discount factor of say 0.6. Given the same utility values used above we find thatfor a person with a discount factor of 0.6, the present value of utility from notconsuming 100 60 36 250 is less than the present value of utility

following consumption 120 54 32:4 255: For such a consumer, theimmediate gain in utility from consumption is greater than the discounted future costof lower utility levels in future years and so the consumer starts to consume. If theconsumer were already consuming and then stopped, utility would initially fall to 70and then rise back to 100 in all subsequent periods so that the present value of utilitywould be 70 60 36 220: If the consumer is already consuming andcontinues to consume, the utility will be 90 in all periods and so the present value ofutility would be 90 54 32:4 225: When a person has a low discount factorthe future gains in utility do not compensate for the immediate pain of withdrawal andso the consumer does not stop using.

In broad terms, the rational addition hypothesis suggests:.

increases in the price of alcoholic beverages by way of tax increases will reduceconsumption, and the consumption response will be greater in the long run;. long-term policy announcements that commit jointly to current and future action

will have a greater impact;. the provision of further information about the potential negative health and other

impacts of alcohol consumption decisions will reduce consumption;. information programmes could be most usefully targeted towards people that

discount the future heavily, which are, generally speaking, the young, those withlower levels of education, and those with lower incomes; and

. as consumers are rational, arguments for restricting alcohol consumption andimposing excise taxes rest on the existence of negative externalities.

3. Alcohol consumption and externality costsThe WHO provides summary details on per capita alcohol consumption for broadlydefined regions. With the exception of those regions with a high-Muslim population, itis notable that there has been a tendency towards convergence in alcohol consumptionlevels across regions. Consumption levels for Europe, Africa, and the Americas, whereaggregate alcohol consumption was either high or moderate in 1961, peaked in theearly 1980s and have since gradually fallen. In South-East Asia and the WesternPacific, where alcohol consumption was typically low in 1961, consumption levels havegenerally increased (WHO, 2004, pp. 9-10).

The trend towards convergence with respect to alcohol consumption is also trueacross countries. Per capita ethanol consumption information for select OECD

countries between 1961 and 2001 is shown in Table I. From the detail shown in thetable it can be seen that between 1961 and 1971 total alcohol consumption, on average,across the countries considered, increased, and then from 1971 onwards tended to fall.Although this is true on average, it is also true that there has been notable convergenceregarding levels of alcohol consumption across individual countries.

The countries with very high per capita ethanol consumption in 1961 such asFrance and Portugal have seen substantial reductions in ethanol consumption inrecent decades. At the same time, those countries with very low per capita ethanol

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consumption in 1961 such as Finland and The Netherlands have generally seenmodest increases in ethanol consumption. The coefficient of variation (standarddeviation divided by mean) information presented in the bottom row of the table showsthat for the countries considered the extent of dispersion in per capita alcoholconsumption levels has fallen substantially between 1961 and 2001. It is notable thatreal incomes have grown substantially in recent decades. That total ethanol intakeshould generally have fallen while real incomes have risen suggests policy makers can

be relatively relaxed about the addictive properties of alcohol.Considering per capita pure ethanol consumption is one way of presenting alcohol

consumption information. Another way of presenting alcohol consumption data is toconsider either the conditional or unconditional budget share for each alcoholicbeverage. Given the unconditional budget share for any one alcoholic beverage isrelatively small, the literature generally refers to the conditional budget share. Theconditional budget share of beverage i (i beer, wine and spirits) in country cdenoted, is given by where is the price of beverage i in country c, is the quantity ofbeverage i consumed in country c, and Table II shows details on both the per capitaspend on alcoholic beverages across a range of countries and the conditional budgetshare of each beverage. The expenditure measure is for off-trade purchases only, and tothe extent that there may be difference in off-and on-trade purchases, both across

countries and across beverage types, the ranking of countries in terms of total alcoholspend may vary to that presented in Table II. As can be seen from the table, theresidents of Norway, Ireland, and Finland spend the most on alcohol, and the residentsof Turkey, Spain, and Italy spend the least.

This does not of course, mean that the residents of Norway, Ireland, and Finlanddrink the most. In per capita terms, of the countries listed in Table II, the Lithuanians(109L), Czechs (100L) and Estonians (96L) purchase the most beer for homeconsumption; the Portuguese (41L), the Swiss (35L), and the Danes (33L) purchase the

No. Country 1961 1971 1981 1991 2001

1 Australia 9.3 11.6 13.0 10.0 9.82 Canada 7.2 9.0 10.8 8.8 7.6

3 Finland 2.9 6.4 8.0 9.2 8.94 France 25.1 22.5 19.7 16.2 12.95 Ireland 7.8 17.2 13.0 10.6 12.36 Italy 16.6 18.2 13.0 10.7 8.77 The Netherlands 3.7 8.5 11.3 10.0 10.08 New Zealand 5.3 10.4 11.7 10.3 8.99 Norway 3.5 4.9 5.3 4.9 5.6

10 Poland 6.5 8.0 8.7 8.8 8.511 Portugal 17.2 20.0 15.6 15.8 13.012 Spain 9.6 16.0 17.6 13.2 11.713 Sweden 5.1 7.0 6.3 6.3 6.214 USA 7.8 9.8 10.5 9.7 8.3

Mean 9.1 12.1 11.8 10.3 9.5

SD 6.3 5.6 4.1 3.1 2.3SD/mean 0.69 0.46 0.35 0.30 0.24

Source: Selvanathan and Selvanathan (2005)

Table I.

Per capita (15 years plus)ethanol consumptionthrough time

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most wine for home consumption; and the South Koreans (18L), the Estonians (15L),and Lithuanians (12L) purchase the most spirits for home consumption.

In Table II, the national beverage or beverages of choice are indicated in italics. Ascan be seen by reading down the table there is significant diversity in the choice ofbeverage across countries. Some countries, such as Japan, Turkey, and Australia areclearly beer drinking countries; other countries such as Switzerland, Portugal, and Italyare clearly wine drinking countries; and Latvia, Estonia, and Lithuania are locationswhere spirit drinking dominates.

For some health conditions, such as alcoholic liver cirrhosis, the cause of theproblem is entirely related to alcohol consumption. For a significant range of otherillnesses, high levels of alcohol consumption are associated with elevated disease risk(WHO, 2004, p. 45).

Alcohol consumption is also associated with increased risk of traffic accidents, falls,and drowning. Violent crime is also often associated with alcohol. For example, alcoholis thought to be a factor in 24 percent of all homicides (Room et al., 2005, p. 520). Heavyalcohol consumption is however not necessarily associated with lower earnings, and

Per capita spending Conditional budget shareCountry Beer Wine Spirits Total Beer Wine Spirits Total

Norway 372.1 316.9 229.8 918.8 40.5 34.5 25.0 100

Ireland 256.9 274.4 173.7 705.0 36.4 38.9 24.6 100Finland 321.5 154.6 200.3 676.4 47.5 22.9 29.6 100Canada 271.8 176.8 148.4 597.0 45.5 29.6 24.9 100Australia 323.4 177.5 95.7 596.6 54.2 29.8 16.0 100Denmark 237.5 240.1 86.6 564.2 42.1 42.6 15.3 100Switzerland 86.6 411.1 64.4 562.1 15.4 73.1 11.5 100New Zealand 233.7 235.0 73.6 542.3 43.1 43.3 13.6 100UK 167.1 251.0 116.1 534.2 31.3 47.0 21.7 100Sweden 144.0 220.3 117.5 481.8 29.9 45.7 24.4 100Estonia 143.2 80.2 205.7 429.1 33.4 18.7 47.9 100Lithuania 147.7 45.2 165.1 358.0 41.3 12.6 46.1 100France 54.0 205.5 93.8 353.3 15.3 58.2 26.5 100USA 183.3 67.5 94.5 345.3 53.1 19.5 27.4 100

Belgium 114.1 155.6 61.8 331.5 34.4 46.9 18.6 100 Japan 194.9 53.2 61.6 309.7 62.9 17.2 19.9 100The Netherlands 114.9 111.0 61.9 287.8 39.9 38.6 21.5 100Austria 137.6 91.9 42.0 271.5 50.7 33.8 15.5 100Greece 41.6 163.2 66.6 271.4 15.3 60.1 24.5 100Portugal 48.8 190.6 27.6 267.0 18.3 71.4 10.3 100Czech Republic 114.9 49.3 87.3 251.5 45.7 19.6 34.7 100Germany 94.3 89.2 58.7 242.2 38.9 36.8 24.2 100Latvia 77.5 56.5 102.1 236.1 32.8 23.9 43.2 100Poland 106.3 23.5 103.7 233.5 45.5 10.1 44.4 100South Korea 107.4 38.0 49.7 195.1 55.0 19.5 25.5 100Italy 37.8 113.4 23.8 175.0 21.6 64.8 13.6 100Spain 48.3 36.6 46.3 131.2 36.8 27.9 35.3 100Turkey 54.0 7.3 13.2 74.5 72.5 9.8 17.7 100

Source: GMID database

Table IPer capita (legal drinkin

age) spending on be

wine and spirits in 200(US

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even if heavy drinking is associated with lower earning such costs are internal cost andare not externality costs[1].

Although the limits placed on citizens vary from country to country, driving with ablood alcohol level below a certain level, which is sometimes zero for young drivers, is

an almost universally imposed driving condition.Despite this restriction, driving while under the influence of alcohol remains a

significant problem. For the period 1950 to 1995, Skog (2001) found alcoholconsumption to be an important factor in traffic deaths in both Central and SouthernEurope. When considering data for 2002, Quinlan et al. (2005) found that 41 percent ofroad traffic deaths in the USA were attributable to alcohol. For Japan, Fujita andShibata (2006) cite statistics that show for the period 1995 to 2001 the percentage ofroad fatalities attributable to alcohol was between 13 and 14 percent. In Australia,using data from the 1990s, Drummer et al. (2003) found alcohol to be a factor in29 percent of road fatalities. In European, Anglo-Saxon, and Asian countries, alcoholcontinues to be an important factor in road-traffic deaths and road-traffic accidents.

Direct measures such as deaths or injuries attributable to alcohol capture only partof the negative impact of alcohol consumption. Heavy alcohol consumption is alsoassociated with a range of social ills. The estimates of the annual economic and socialcost of alcohol abuse reported for different countries in WHO (2004, p. 66) are variedbut all the estimates are extremely large. To see how it is possible to arrive at very highestimates of the economic and social cost of alcohol, it is worth considering a recentAustralian study. Using self-reported measures, Pidd et al. (2006) estimated that in2001, 2.7 million working days were lost in Australia due to alcohol-relatedabsenteeism, and that the cost of these lost days was AU$ 440 million. As aninteresting extension, Pidd et al. (2006) also consider the possibility that the overallabsentee rates due to illness and injury might not be the same for drinkers andnon-drinkers. The absentee rates due to injury or illness of alcohol abstainers werecompared to the absentee rates due to illness and injury of various groupings of alcoholdrinkers to obtain an estimate of the extent of any additional work absenteeismattributable to injury and illness that might be explained by alcohol consumption.Drinkers do have higher absentee rates for injury and illness, and using this expandedmeasure it was found that in 2001 the combined extent of absenteeism attributable toalcohol was 7.4 million days lost, with an implied cost of AU$ 1,200 million. Australiais not unique, and using Swedish data from 1935-1990 Norstrom (2006) found that aone litre increase in the per capita consumption of ethanol was associated with anincrease of 13 percent in male illness-related absenteeism.

Considerable detail on the cost of alcohol consumption in the UK has been presentedto the UK Government (2003). Some calculations with regard to costs that are reported

in the study, such as those related to lost output due to absenteeism and prematuredeath, are involved and require assumptions that not all will agree with. Othercalculations are however more straight forward and less controversial. For example, in2000-2001, alcohol-related health care costs, other than health care costs associatedwith alcohol-related motor vehicle accidents, were estimated to be between 1,400 and1,700 million. Costs incurred by the police and the legal system as a consequence ofalcohol-related crime were estimated to be approximately 1,700 million. Total costs tothe UK society, including estimates for such things as lost output due to absenteeism

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and premature death, and time taken by victims of crime to recover, were estimated tobe between 18,500 and 20,000 million.

Alcohol consumption does place externality costs on society and so it is appropriatethat alcoholic beverages are taxed to recoup these costs. Calculating the cost to society

of alcohol consumption is however not simple. Cnossen (2007) reviews alcoholexternality cost estimates from several studies and compares the estimates to alcoholexcise revenue. The review shows that for Ireland, England and Wales, Denmark,Belgium, The Netherlands, France, Germany, Spain, Portugal, and Italy, the amountcollected from alcohol excise taxes is not sufficient to cover the externality costs ofhealth care and treatment, criminal justice expenses, property damage, and trafficaccident costs. Of the countries reviewed, Finland is the only example where alcoholexcise taxes are sufficient to cover these costs.

It is however worth noting that the reference year for alcohol excise tax informationin Cnossen (2007) is 2003 and that in 2004 Finnish beer, wine, and spirit taxes werereduced by 10, 32 and 44 percent, respectively.

Barker (2002) uses the estimates of direct costs in Devlin et al. (1997) to show that inNew Zealand excise taxes on alcohol are sufficient to cover externality costs. On thequestion on excise taxes collected relative to externality costs in the USA, Heien (1995)and Grossman et al. (1995) express different views, although perhaps the argumentsthat excise tax rates in the USA are too low put forward in Grossman et al. (1995) aremore convincing. For Australia, the actual alcohol excise and customs revenue for2004-2005 was equal to approximately 70 percent of the Collins and Lapsley (2008)estimated net health, road trauma, and crime-related costs associated with alcoholconsumption for the same year. So while it is not exclusively the case, in generalalcohol excise taxes do not cover the externality costs associated with alcoholconsumption. Such a situation suggests that in many countries it is appropriate toconsider additional alcohol policy measures.

4. Alcohol policy options and their effectivenessDepending on the nature of the demand response, higher alcohol excise taxes may raisemore or less revenue for governments. In any event, it is not clear that raising alcoholexcise taxes is the most appropriate policy response. Where the externality costassociated with alcohol consumption is greater than alcohol excise revenue,governments can focus on policies that raise greater revenue or policies that lowerthe externality cost.

The impact of advertising on the actions of individuals can be traced back at leastas far as Galbraith (1967) where it is argued that the selling strategy deployed bycompanies can alter in important ways where consumers spend their money. When itcomes to alcohol, governments have generally taken the potential for industry

participants to influence the spending patterns of consumers seriously, and have, overthe years, imposed various restrictions on alcohol advertising. The restrictions havetaken many forms: restrictions on the time and days when advertisements can beshown; outright advertising bans for some beverage types, typically spirits; outrightbans for some types of advertising, often billboard advertising; implementation ofindustry codes of practice, etc. A relatively comprehensive country-by-countrysummary of the different alcohol-advertising restrictions that exist can be found inSelvanathan and Selvanathan (2005, pp. 304-11).

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The Galbraithian view of advertising that it is possible for advertising to changenot only the brand of good a consumer chooses within a given broad commoditygrouping but also the overall allocation to aggregate commodity groupings is notwidely held by economists. Generally, economists see advertising as influencing

decisions about which particular brand to choose rather than the overallbudget allocation to a particular consumption group. As such, when demandmodelling progressed from single-equation utility-free approaches to system-wideequation approaches based on utility theory, advertising effects were not commonlymodelled or tested.

That standard economic analysis generally does not treat advertising well ispossibly due to the reluctance of economists to consider the possibility that advertisingcan alter consumer tastes. Becker and Murphy (1993), by setting up a standardconsumer theory based framework where advertising is treated as a complement goodand so enters the consumer utility function directly, offered a way forward foreconomics to treat advertising. Essentially, the theory says that if advertising for beeris a complement to beer consumption, greater beer advertising will lead to greater beerconsumption. As the Becker and Murphy (1993) framework sits entirely within thestandard economic approach to consumer behaviour, all the results of consumer theoryapply, including some that while plausible might be questioned. For example,consumer theory imposes symmetry in cross-price effects for all goods consumed. Thisrequirement says that if the good beer advertising is a complement to the good beer(reasonable assumption); the good beer is a complement to the good beer advertising(plausible but less reasonable assumption). In formal terms the advertising as acomplement good theory requires both the following results hold:

. beer advertising increases the marginal utility of beer consumption and henceincreases the demand for beer; and

. beer consumption increases the marginal utility of beer advertising and hence

increases the demand for beer advertising.

The theory of advertising as a complement to consumption may not be a perfecttheory, but it nevertheless represents a substantial improvement on notions ofadvertising representing information only which has sometimes been the defaultposition in economic studies. The theory also provides a theoretical framework thatsupports the idea that alcohol advertising can result in higher levels of consumption.Given the Becker and Murphy (1993) theory, and the Galbraith (1967) view, it is worthinvestigating the empirical evidence regarding alcohol advertising and alcoholconsumption.

Nelson (2003) takes advantage of the different alcohol policies in the US states toinvestigate the impact of different alcohol advertising restrictions on the US alcohol

consumption. In addition to results for total ethanol consumption, results are alsoreported for individual beverage effects. A billboard spirits advertising ban is shown tobe associated with higher overall ethanol consumption, higher spirits and wineconsumption, and lower beer consumption. The finding that billboard advertising bansfor spirits are associated with higher spirits consumptions is consistent with thefindings reported in Ornstein and Hanssens (1985). Another type of advertisingrestriction that Nelson investigates relates to the effect of restricting advertising theprice of spirits. Not allowing spirits prices to be advertised should raise search costs,

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which in turn raises the total price of sprits, which in turn should lower spiritsconsumption. The evidence presented suggests that not allowing spirits prices to beadvertised does lower spirit consumption, but the restriction is also associated withhigher beer and lower wine consumptions. The net effect is therefore to leave total

ethanol consumption unchanged.At the individual beverage level, several studies have estimated alcohol advertising

elasticities. Nelson and Moran (1995) estimate four different system-wide demandmodel specifications to investigate the demand for beer, wine, and spirits. In the case ofbeer and spirits, no own-advertising elasticity estimates are positive. For wine, theestimates are positive and statistically significant, but are of a very small magnitude.When considering ethanol consumption no evidence is found for an advertising effect.Using more detailed advertising information the result is confirmed in Nelson (1999),where although some minor advertising effects are detected across beverages,advertising is shown to have no impact on total ethanol consumption. Using acointegrating version of the AIDS demand model, Duffy (2002) found thatown-advertising effects and cross-advertising effects for beer, wine, and spirits inthe UK were generally zero, and where they were non-zero the effects were very smalland sometimes had the wrong sign. Advertising is also shown to have essentially noimpact on total alcohol consumption.

The results agreed with the findings of earlier studies on advertising and alcohol inthe UK (Duffy, 2001, 1995, 1987; Blake and Nied, 1997; McGuninness, 1983).

The results of Saffer and Dave (2006) regarding the effect of alcohol advertising inthe USA are worth noting both for the result themselves, and for the hypothesis theauthors put forward. The authors hypothesises that alcohol advertising does increasesconsumption but that the increments are subject to diminishing marginal returns. Theadvertising to sales ratio in the alcohol industry is high.

Studies using aggregate advertising data, such as the studies cited above, may

therefore be investigating the impact of advertising over a range where the marginalimpact is very low. To investigate the validity of the hypothesis, the authors make useof the substantial variation in advertising across major US cities on the decision ofAmerican teenagers to participate in drinking and to participate in binge drinking andfound that advertising had a small positive effect. To put the results in perspective, theauthors report the results of a simulation exercise where there is a 28 percent reductionin total alcohol advertising. The results suggest that a 28 percent reduction inalcohol advertising holding constant non-direct advertising such as sponsorships,etc. would lower youth participation in binge drinking from 12 percent to between11 and 8 percent, and past month participation in drinking from 25 percent to between24 and 21 percent.

There is little other evidence for countries outside the USA and the UK regarding

the impact of advertising on alcohol consumption, although Owen (1979) foundadvertising to be insignificant in an investigation of wine demand in Australia. It doeshowever seem likely that substantial reductions in alcohol advertising will have atmost a small to modest impact on the alcohol consumption decisions people make.Where restrictions apply to a particular beverage there may be a reduction in demandfor that beverage. However, due to substitution effects there is likely to be an increasein the consumption of other alcoholic beverages and this increase may offset the effectof the advertising ban. Finally, it needs to be noted that much of the alcohol advertising

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spend is actually on promotions and sponsorships. As such, when faced with anadvertising restriction of one kind or another, alcoholic beverage companies maysimply increase the amount spent on promotions and sponsorships. Any suchspending is likely to further limit the effectiveness of advertising bans.

Drunk-driving laws have resulted in fewer fatalities and injuries and so havelowered externality costs (Rogers and Schoenig, 1994; Neustrom and Norton, 1993;Hingson et al., 2000). Regarding the young and drunk driving in the USA, there havebeen several studies. The meta-study of Zwerling and Jones (1999) and subsequentwork such as Eisenberg (2003) support the proposition that lowering the legal BAClimit for young drivers works to reduce fatal road crashes. Carpenter (2004) suggeststhat the key behavioural change that the zero-tolerance BAC laws have is to reducethe heavy drinking activities of young males. Zero-tolerance drunk-driving laws for theyoung therefore appear to not only reduce road accidents, but also have a morepervasive impact as they change behaviour such that episodes of binge drinkingare reduced.

Sen (2005) used data on the blood alcohol level of fatally injured drivers toinvestigate the impact of tougher drunk-drinking laws, and the impact of media storiesabout drunk driving in Canada over the period 1982-1992. Results are reported formultiple regression specifications and the possibility that media publicity isendogenous is also considered. The findings reported suggest that media publicityregarding drunk driving is associated with a reduction in the probability that thefatally injured driver had a blood alcohol level greater than the legal limit of 0.08.Consistent with the rational addiction hypothesis, additional information in the form ofmedia publicity regarding the penalties and consequences associated with drunkdriving can impact consumer behaviour.

Results are reported in Freeman et al. (2007) for a study investigating the impact of aso-called lock out policy at late night drinking establishments on the Australian Gold

Coast. The specific policy change evaluated was the introduction of a policy wherebynew patrons are not allowed to enter licensed venues after a certain time, but thosealready inside are allowed to stay inside. In the study, the specific lockout period wasbetween 3 a.m. and 5 a.m. The policy did not appear to have a statistically significantimpact on traffic offences involving alcohol, or property, stealing, and assaultincidents, but general disturbance incidents and sexual incidents between 3 a.m. and6 a.m. in the area were lower, and the difference was statistically different. In the caseof sexual incidents that required the attendance of a police officer, prior to the policychange 56 percent of reported sexual incidents involved alcohol. After the policychange only 23 percent of reported incidents involved alcohol. More generally, for theperiod 3 a.m. to 6 a.m. the proportion of alcohol-related incidents that required theattendance of a police officer fell from 51 to 39 percent of incidents. Evaluated over a

24-hour period the fall in the proportion of alcohol-related incidents requiring a policeofficer to attend was however much smaller. Specifically, the share of alcohol-relatedincidents fell from 26 percent prior to the policy change to 23 percent after the policychange.

Bouffard et al. (2007) report that following an extension of trading hours inMinnesota there was a statistically significant increase in drunk-driving arrests.However, following detailed analysis of the distribution of offences and enforcementbehaviour the authors conclude that the observed increase in drunk-driving charges

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were probably a result of greater policing rather than a change in behaviour. Increasesand decreases in establishment drinking hours do not appear to play a significant rolein changing behaviour. As such, they are unlikely to be an especially effective policymeasure in reducing externality costs.

A final policy area to investigate is the impact of higher prices on alcoholconsumption. Outside Kenkel (2005), which deals with alcohol tax pass through ratesin Alaska, there is relatively little evidence regarding actual alcohol excise tax passthrough rates. As such, the focus here is on the effect of price changes more generally.The own-price elasticity of a good is defined as the percentage change in quantitydemand divided by the percentage change in price. In the alcohol-demand literature,details are reported for Marshallian, Hicksian, and Frisch own-price elasticityestimates. Marshallian own-price elasticities measure the total observed consumptionchange following a price rise and include both the income effect and the price effect.Frisch own-price elasticities measure the consumption change where the marginalutility of income is held constant, and Hicksian own-price elasticities measure the pureprice effect. Where the objective is to understand the effect a price change will have onconsumption it is most useful to concentrate on the reported pure price effect. Theremainder of the discussion presented in this section therefore relates to Hicksianelasticity estimates only.

Fundamentally, the own-price elasticity of a good is determined by the number ofsubstitute products. That this is the case can be seen by considering the implications ofdemand homogeneity in elasticity form. Demand homogeneity says that the sum of theown-price elasticity and the cross-price elasticities must equal zero, where byconstruction the Hicksian own-price elasticity must be negative. A negative cross-priceelasticity indicates the goods are complements, and a positive cross-price elasticityindicates the goods are substitutes. The number of substitute products and the degreeto which they are substitutable therefore determines the Hicksian own-price elasticity

of a good. As alcohol is both mind altering and addictive, it is reasonable to suggestalcohol has relatively few substitutes. On this basis, estimates of the own-priceelasticity of demand for alcoholic beverages are unlikely to be far from zero. If,however, consumers see beer, wine, and spirits as good substitute products, the ownprice elasticity estimates could be some distance from zero.

The approach taken to estimate the demand for alcoholic beverages has evolvedsubstantially over time. The oldest approach in the literature is the utility-freeapproach, where typically, but not always, a double-log demand equation is estimated.Some of the earliest examples of the approach that are relevant include Stone (1945)and Prest (1949). Single-equation approaches were progressively replaced bysystem-wide approaches, most commonly either the AIDS approach due to Deatonand Muellbauer (1980), or the Rotterdam model based on the work of Barten (1964)

and Theil (1965). More recently, explicit time-series approaches have appeared tocomplement system-wide approaches. Additionally, models have been developed totest the rational addiction hypothesis of Becker and Murphy (1988). Although whenusing modern approaches to estimate demand responses elasticity estimates do notalways naturally appear in the equations estimated, the implied elasticity values arenevertheless almost always reported.

Summary details are shown in Figures 1-3 on estimates of the Hicksian own-priceelasticity estimates for beer, wine, and spirits reported in the literature. In each of the

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figures, the small dots represent actual own-price elasticity estimates reported in the

literature and the large solid dot represents the arithmetic mean own-price elasticityestimate for each country. The thick grey line represents the arithmetic mean valuetaken across all observations. At the aggregate level the mean own-price elasticityestimates across all observations are: beer 0.44, wine 0.63, and spirits 0.69. So,while demand for alcoholic beverages appears to be price inelastic, increases in theprice of alcoholic beverages will result in lower consumption.

In Figures 1-3, a dashed line is used to indicate a value of zero. As can be seen in thefigures, at the individual country level occasionally positive own-price elasticity

Figure 1.Review of alcoholconsumption

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.5

United Kingdom

Sweden

SpainNorway

New Zealand

Japan

France

Finland

Denmark

Cyprus

Canada

Australia

United States

Figure 2.Review of alcoholconsumption

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.5 1.0

United Kingdom

Sweden

Spain

Norway

New Zealand

Japan

FranceFinland

Denmark

Cyprus

Canada

Australia

United States

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estimates are reported. For example, there is one positive beer own-price elasticityestimate for the USA. Most of the reported estimates for beer in the USA are however$ 2 1 and # 0, and the mean own-price elasticity estimate for the USA is 0.45.Across all beverages and all countries, with the exception of wine in Japan, the meanown-price elasticity estimate is negative. For the case of wine in Japan, although themean own-price elasticity estimate is positive the median estimate is negative. Theevidence therefore appears to be overwhelming. Increases in the price of alcoholic

beverages lead to decreases in consumption, everywhere.As the demand for beer, wine, and spirits appears to be price inelastic, it suggestsconsumers generally do not see beer, wine, and spirits as especially substitutableproducts. This is interesting as it suggests consumers are interested in more than justalcohol content when they make a consumption decision. From a research perspective,it would therefore seem wise to study the demand for individual alcoholic beveragesrather than the demand for alcohol as a composite good. In this context, it is alsointeresting to note evidence presented in Clements et al. (1997) that supports theconcept of additive utility for the case of individual alcoholic beverages. Additiveutility is usually associated with broad consumption aggregates such as food andhousing, but when applied to alcohol consumption the concept means that the marginalutility from the consumption of one beverage is not affected by changes in the level of

consumption of the other two beverages. One possible interpretation of such a resultcould be that the consumers of each beverage type represent distinct social groups.

Additive utility also has implications for how alcohol excise taxes can be structured.The Ramsey commodity taxation principle says that the introduction of commoditytaxes should leave the relative proportional demand for each good unchanged. For thecase of additive utility across individual alcoholic beverages such a result suggeststhat this can be achieved by using an inverse own-price elasticity rule. By way ofillustration, consider the case of the UK. In 2006, the excise taxes for beer, wine, and

Figure Review of alcoh

consumptio5.0 4.0 3.0 2.0 1.0 0.0 1.0

United Kingdom

Sweden

Spain

Norway

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Japan

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spirits, expressed per litre of product, were: beer e1.90, wine e2.53, and spirits e11.50(Cnossen, 2007, p. 704). On a per litre of product basis spirits are therefore taxed atabout six times the rate of beer, and four times the rate of wine. The average own-priceelasticity values reported in the literature for the UK were: beer 0.44, wine 0.63,

spirits 0.70.Applying the inverse elasticity rule for the UK suggests that wine should be

taxed approximately 10 percent more than spirits, and that beer should be taxedapproximately 50 percent more than spirits. Under the inverse elasticity approach toalcohol taxation, the actual excise tax rates would be set to recoup the best estimate ofthe externality cost of alcohol consumption.

An important criticism of any policy approach aimed at deceasing alcoholconsumption by increasing alcohol excise taxes would be that the alcohol consumptiondistribution is highly skewed and that the heavy and binge drinkers responsible formuch of the externality cost would not change their behaviour. It could further beargued that as the majority of consumers enjoy alcoholic beverages in moderation, topenalise the majority by way of higher excise taxes is an inappropriate policy response.

Economic theory predicts that for a standard good the higher the budget share ofthe good the greater the observed consumption change following a price change;although not everyone will agree that alcohol should be treated as an ordinary good. If,instead of treating alcohol as a standard consumer good, we treat it as an addictivegood, the rational addiction hypothesis still implies that consumption will fallfollowing a price increase, even for heavy users. Although under the conditions ofrational addiction, the long-run effect will be greater than the short-run effect and so itis important to note that it may take some time before the full impact of a price changeis observed. It is also notable that under the rational addiction model if the priceincrease is significant enough it is possible heavy users will quit use of the goodaltogether. The impact of a price increase under rational addiction is shown in Figure 4.

In Figure 4, the vertical axis measures consumption of the addictive good at a point intime and the horizontal axis measures the stock of what is called addictive capital. Thed represents the rate of depreciation of addictive capital and so the line c dSrepresents all possible steady-states. The various Ai curves represent the relationshipbetween consumption of the addictive good and the stock of addictive capital for aconsumer with a given utility function and a given set of prices.

Consider first the figure on the left. With prices such that A0 represents therelationship between the consumption of the addictive good and the stock of addictivecapital, the stable steady-state is found at consumption c0 where the stock of addictive

Figure 4.

c = S

A0A1

c0ctc1

c = S

A0

A2

c0

ct

c2S0S1 S0S2

Consumption

Stock of addictive capital

Consumption

Stock of addictive capital

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capital is S0. In this particular representation, the individual is a relatively heavy userof the addictive good. An increase in the price of the addictive good will cause the curveA0 to shift downwards to A1. Consumption of the addictive good initially falls to ct, butas consumption at this point is below the steady-state line consumption falls further.

A new steady-state is reached at c1 and S1. Depending on the nature of the addiction,the fall may be relatively small, but in response to a price increase heavy users reduceconsumption, and the impact in the long-term is greater than in the short-term.

Now, consider the figure on the right. The starting point is the same as the figure onthe left, and the initial steady-state is defined by the points c0 and S0. However, thistime the price increase is such that the entire A2 curve lies below the steady-state line.Consumption initially falls to ct, but as consumption is below the steady-state,consumption continues to fall until c0 0. Under the scenario described by theleft-hand side figure the consumer has gone from a heavy user to a complete abstainerof the good.

Regardless of the view, one has of the rational addiction model there is also strongempirical evidence that high levels of average alcohol consumption in a country areassociated with high levels of heavy alcohol consumption (Rose and Day, 1990).Specifically, Rose and Day (1990) use data collected from 52 population centres in32 developed and developing countries to investigate the relationship between averageweekly alcohol consumption and the prevalence of heavy drinkers in the population.Visual inspection of the data shows a clear, strong, linear relationship between thepopulation mean weekly alcohol intake and the percentage of the population that areheavy drinkers. The reported Pearson correlation coefficient between average alcoholintake and the prevalence of heavy drinkers in the population is 0.97, and a 15 millilitreper week reduction in average alcohol consumption in a population is predicted toresult in a fall in the prevalence of heavy drinkers in the population of approximately15 percent. The finding suggests higher excise taxes for alcoholic beverages will result

in lower harmful consumption. The specific channels through which excise taxes willreduce externality costs will be varied, but will include at a minimum lower roadaccident costs (Chaloupka et al., 1993) and lower direct health costs.

The own-price elasticity information tells us that increases in the price of alcoholicbeverages will result in lower average consumption. The rational addiction model saysthat even heavy users of an addictive good will decrease their consumption in responseto a price increase, and the empirical evidence of Rose and Day (1990) suggests thatwhere there is lower average consumption there will be lower heavy consumption.Increases in the price of alcoholic beverages will therefore be an effective policy inlowering the externality costs of alcohol consumption. Further, as the demand foralcoholic beverages has been shown to be price inelastic, higher excise taxes will resultin greater overall excise tax revenue. Excise tax increases therefore work to close the

gap between alcohol externality costs and excise revenue by both lowering externalitycosts and increasing excise revenue.

5. ConclusionOutside those countries with a large Muslim population alcoholic beverages areimportant consumption goods. While alcoholic beverages are enjoyed in moderation bythe vast majority of consumers, a proportion of the population engages in excessivealcohol consumption and binge drinking. As a result, alcohol consumption places

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externality costs on society. Alcohol excise taxes generally, but not everywhere, fail torecover the direct externality costs associated with harmful consumption. In countrieswhere externality costs are not fully recovered there is a role for further governmentaction. This review paper has considered the evidence regarding policies that might be

effective in closing the gap between the alcohol excise revenue and the externality costsassociated with alcohol consumption.

Alcohol advertising restrictions are unlikely to have a substantial impact onconsumer behaviour. Similarly, although changes in opening hours or the introductionof so-called lock out policies may result in changes in alcohol-related incidents aroundthe relevant time period, when such policies are evaluated over a 24-hour period, andthe effects of policing intensity are taken into account, the impacts of such policies arelikely to be modest. Consistent with the rational addiction hypothesis, publicity andinformation about the negative consequences of alcohol consumption are likely to havean impact. For example, greater publicity of the consequences of drunk driving isassociated with a lower probability of alcohol being a factor in road fatalities. Nationaland regional governments can and should be proactive in publicising the potentialconsequences of drunk driving.

Zero tolerance BAC laws for young drivers appear to work by lowering theprobability young men engage in binge drinking, and again are an effective policy.More generally, policies that help the young understand the future consequences oftheir actions and help them value the future appropriately are also likely to be effective.Education and information campaigns that focus on the young are therefore to beencouraged. The demand for alcoholic beverages is price inelastic and so increases inexcise taxes will result in both higher excise tax revenue and lower externality costs.Higher alcohol excise taxes are therefore also an effective alcohol policy tool.

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Corresponding authorJames J. Fogarty can be contacted at: [email protected]

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