Economic research contributes to our understanding of alcohol use and the prevention and treatment of alcohol-related problems in several ways. This article reviews three areas in which the tools of economic analysis have produced significant insights in recent years. First, economic researchers have analyzed the effects of beverage prices and taxation on alcohol consumption and on adverse consequences associated with alcohol use. Second, analyses of the costs and cost-effectiveness of treatment for alcohol use disorders have provided insight into the long-term costs and benefits of alternative approaches to alcoholism treatment. Finally, studies have incorporated economic techniques in estimating the overall magnitude of the burden placed on society by the misuse of alcoholic beverages. KEY WORDS: economic aspects of AOD (alcohol or other drug) and AOD use; AOD price; sales and excise tax; cost of AODU (AOD use, abuse, and dependence) to business; social and economic costs and benefits of AOD; insurance cost due to AODU; cost-effectiveness of AOD health services; econometrics
The economic model of consumer behavior suggests that like other consumer goods, the demand for alcoholic beverages falls when prices rise. A large body of research shows that this "law of demand" holds for alcoholic beverages. This means that excise taxes and other public policies that affect the price of alcohol can influence the demand for alcohol. Because excessive alcohol consumption has adverse consequences for health and safety, studies of the consumer response to changes in alcoholic beverage prices are important.
EFFECTS OF CHANGES IN ALCOHOL PRICES AND TAXES
This section reviews recent economic research on the relationship between alcohol prices or taxes and alcohol consumption and related problems. For reviews of earlier research on these topics see Chaloupka 1993; Chaloupka et al. 1998; Cook and Moore 1993; Kenkel and Manning 1996; and Leung and Phelps 1993.
Public Policies and Alcohol Prices
Public policies can affect alcoholic beverage prices in several ways. One way is excise taxes on alcoholic beverages. An excise tax is based on the quantity of alcoholic beverage purchased, in contrast to a sales tax, which is based on the price of a purchased good. The extent to which increases in excise taxes are passed along to consumers rather than absorbed by firms also determines the price of goods. Because little research has been conducted in this area, it is unclear how excise taxes influence prices for alcoholic beverages.
Some States exercise direct influence over alcoholic beverage prices by maintaining monopoly control over the sale of such beverages. Limited evidence suggests that alcoholic beverage prices have, on average, been about the same or only slightly higher in States with monopoly control (Nelson 1990) and that privatization has sometimes, but not always, resulted in lower prices (MacDonald 1986).
When evaluating alcohol price and tax policies, it is important to consider the context provided by other public policies, private market forces, and general economic conditions. For example, alcohol excise tax rates are not routinely increased to compensate for the effects of inflation. As a result, the "real" (i.e., inflation-adjusted) tax rates have declined over most of the postwar period, except for the significant tax increase that took effect in 1991. This erosion of real tax rates has contributed to overall declines in real beverage prices over time (see figure 1).
Alcohol Prices, Taxes, and Consumption
Although consensus exists among researchers that higher alcoholic beverage prices and taxes result in less drinking and fewer drinking-related problems, the magnitude of consumer response to price or tax changes is more difficult to determine. Economists measure consumer response to price changes by computing the price elasticity, defined as the percentage change in demand that results from a 1-percent change in price (see textbox, page 64). …