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Consumption Externalities and the Role of Government: The Case of Alcohol

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Abstract

This paper considers the role of government in the case of externalities and, in particular, in the case of alcohol externalities. The purpose of the paper is to assess whether the current level of the alcohol excise can be justified on externality grounds. The paper assesses various mechanisms to address externalities. These mechanisms are institutional solutions, trade in rights to generate externalities, regulatory measures and Pigouvian taxes. The paper assesses these tools in the case of alcohol and concludes that institutional, trade and regulatory solutions are limited in their ability to address the externalities of alcohol. A specific tax can be justified in the case of alcohol. The externalities are large and there is sufficient information on which to base a tax. Given the information constraints the specific tax must be applied uniformly across a rage of units of consumption, rather than to particular individuals. Where an optimal uniform tax is imposed it is reasonable to assume that the amount of revenue collected by the government would be at least as large as the total externality. In 1999/00 the amount of revenue collected from the tax on alcohol was $580 million. This is near the mid-point of the estimated bound of the external tangible costs of alcohol. Thus the current rate of excise tax can be justified on externality grounds.

Suggested Citation

  • Felicity Barker, 2002. "Consumption Externalities and the Role of Government: The Case of Alcohol," Treasury Working Paper Series 02/25, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:02/25
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    File URL: https://treasury.govt.nz/sites/default/files/2007-09/twp02-25.pdf
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    References listed on IDEAS

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    1. Vivian Hamilton & Barton H. Hamilton, 1997. "Alcohol and Earnings: Does Drinking Yield a Wage Premium," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 135-151, February.
    2. Garry F. Barrett, 2002. "The Effect of Alcohol Consumption on Earnings," The Economic Record, The Economic Society of Australia, vol. 78(240), pages 79-96, March.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Costs and benefits of alcohol, properly done
      by Crampton in Offsetting Behaviour on 2009-04-27 06:35:00

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    Cited by:

    1. Harry Clarke, 2008. "The Economist’s Way of Thinking About Alcohol Policy," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 15(2), pages 27-44.
    2. Creedy, John & Sleeman, Catherine, 2006. "Carbon taxation, prices and welfare in New Zealand," Ecological Economics, Elsevier, vol. 57(3), pages 333-345, May.
    3. John Creedy, 2004. "The Effects on New Zealand Households of an Increase in The Petrol Excise Tax," Treasury Working Paper Series 04/01, New Zealand Treasury.
    4. Sijbren Cnossen, 2007. "Alcohol taxation and regulation in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(6), pages 699-732, December.
    5. John Creedy & Cath Sleeman, 2005. "Excise taxation in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 39(1), pages 1-35.
    6. Eric Crampton & Matt Burgess & Brad Taylor, 2011. "The Cost of Cost Studies," Working Papers in Economics 11/29, University of Canterbury, Department of Economics and Finance.

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    More about this item

    Keywords

    Externalities; Alcohol; Coase theorem; Pigouvian tax;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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