Are Higher Alcohol Taxes Justified

Recently, economists have entered the alcohol policy arena by pointing out that consumption, and also abuse, may be reduced through price increases induced by taxation. Articles have appeared on various aspects ofalcohol abuse, such as drivingunder the influence, youth alcohol abuse, and labor market effects. Many of those articles have the goal of estimating the elasticity of abuse with respect to a tax increase. The notion that abuse can be curbed by taxation has led to a call for increased taxes on alcohol. However, the economic justification for a tax increase is that it meet the social cost-efficiency criterion—that is, the marginal external cost of alcohol abuse should exceed the existing marginal tax rate. Although the studies referred to were wellexecuted in terms ofthe particular focus and econometric technique, very little has been done recently to examine the justifica-tion of a tax increase in terms of social costs. The question of the external cost of alcohol use, as contrasted with abuse, is complex and paradoxical. It is complex because there are two classes of consumers: abusers and moderate drinkers. Although externalities are associated mainly with abusers, both classes pay the tax because it is impossible to differentiate between abusers and moderate drinkers at the point of sale. Hence, a tax on alcohol is an externality for moderate drinkers. The main negative externalities are driving-under-the-influence (DUI) fatalities and injuries, increased medical insurance premiums, and the effect on social security funding of premature death. The paradox of alcohol taxation arises because of the effect on the health and economic welfare of moderate drinkers. Although it is well known that excessive drinkers often have major health problems, i