Saturday, 25 April 2009

The cost of cost studies (updated x3)

Over at Offsetting Behaviour Eric has a nice piece, Costs of everything, value of nothing, on a recent BERL study into the costs of alcohol use in New Zealand. The costs, and only the costs, no benefits just the costs, and even then they don't measure the costs correctly.

Read Eric's posting because the basic logic he uses applies not just to this study but to many other of these types of things. You see any number of these types of reports, most of which should be ignored for the reasons Eric points out. Unfortunately at times such wastes of paper become influential in policy circles and bad policy is the result. What would happen if this report was taken seriously? What would happen if large extra taxes were applied to alcohol or if outright bans were imposed? The short answer would be a black market would develop with all its associated costs. The control or even banning of alcohol comes with its own costs and these should not be ignored.

Another example of this type of report would be the O'Dea Report, a similar report on the costs of smoking. Eric criticised that report in the New Zealand Medical Journal. Lots of similarities between this report and that one. When the desired conclusion drives the method, take care in interpreting the results.

Update: rauparaha at TVHE comments here.

Update 2: Eric adds an additional posting on this topic at Offsetting Behaviour. He notes
BERL cites total social costs of $5.3 billion. $3.9 billion of that, 74%, cannot honestly be counted as policy-relevant costs from an economic perspective.
He also adds an Update/correction to his previous post.
I misread the final paragraph of the report. They list excise taxes of $167 million from excessive alcohol use and health costs of $286 million. Note, though, that these are only the proportion of excise taxes paid by individuals defined as consuming "excessively". Actual excise taxes in 2008, by Crown reports, were $573 million. Actual alcohol tax revenue outweighs actual health expenditures on alcohol, but tax revenues from problem drinkers don't cover their health costs. This is always a problem with a linear tax on something that has convex costs. See Felicity Barker's excellent Treasury analysis of 2002 on alcohol taxes.
Update 3: Will de Cleene has a go at BERL bashing.

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