The dismissal of consumer surplus-based ways to value alcohol consumption is puzzling. The main justification is that “it seems likely to us that consumers are behaving irrationally”, but this is an overly broad statement. What fraction of alcohol consumption is irrational? If you believe that 30% of consumers are consuming irrationally high amounts, you could easily exclude the 30% heaviest drinkers and estimate consumer surplus for the remainder. In general, you can choose a population where you believe people are consuming more out of enjoyment than addiction.
This would require a bit of primary investigation, but you could use Nielsen scanner data with alcohol prices and consumption to a) drop the people who drink the most, b) estimate consumer surplus on the remainder. I’m pretty sure Nielsen has similar data in some LMICs if you want a more representative population. My prior is that you would arrive at substantially more than a 10% downward adjustment.
(Speaking for myself; the 10% estimate comes from work I did at GiveWell but others at Open Phil and GiveWell may disagree with me)
I agree we shouldn’t dismiss consumer surplus entirely, and in retrospect would soften some of the wording in that doc – I think the irrationality point is important but not totalizing. The Nielsen idea is interesting and I’d like to think about it more. I think internalities are less bimodally distributed between people than your model, which muddies the waters, but I wonder if an analysis like that could still be informative.
Fwiw the program we funded is primarily focused on taxation, which is a nice mechanism to balance a recognition of externalities / internalities with a general prior towards personal choice. I’d estimate higher than 10% if that wasn’t the case. A focus on tax means the reduced consumption will be from the drinks for which people had the lowest willingness to pay, limiting lost consumer surplus.[1] It also results in increased tax revenue, so could be considered as trading off against alternative ways of raising tax revenue with their own deadweight loss in consumer surplus.
TBC, I recognize the inherent fragility / subjectivity of the 10% estimate and I suspect different people would come to quite different conclusions about what input to use, so I’d be excited to see more efforts to estimate this considering the broad sweep of evidence.
Of the two studies I could find on consumer surplus, the one which attempted to estimate consumer surplus from a marginal increase in price (rather than for typical consumption) estimates a loss of €58 million in consumer surplus, compared to a €700m improvement in “health, productivity, and non-financial welfare losses” (Anderson and Baumberg 2010, pg 34), implying an offsetting impact of ~8%. (Though I think there are a bunch of ways in which that study isn’t analogous to the models we use, including a higher estimate of non-health impacts, so difficult to know what to make of it).
This also raises a separate worry about the extent to which taxation affects heavy drinkers, where the marginal harm is likely highest, which we tried to account for separately in the effect size estimate.
Fair points, I agree that taxation has a lower bar. The bimodal point was illustrative, you could take some other individual characteristics as proxies for the extent of internalities (e.g. education) and weight people by that when estimating.
The dismissal of consumer surplus-based ways to value alcohol consumption is puzzling. The main justification is that “it seems likely to us that consumers are behaving irrationally”, but this is an overly broad statement. What fraction of alcohol consumption is irrational? If you believe that 30% of consumers are consuming irrationally high amounts, you could easily exclude the 30% heaviest drinkers and estimate consumer surplus for the remainder. In general, you can choose a population where you believe people are consuming more out of enjoyment than addiction.
This would require a bit of primary investigation, but you could use Nielsen scanner data with alcohol prices and consumption to a) drop the people who drink the most, b) estimate consumer surplus on the remainder. I’m pretty sure Nielsen has similar data in some LMICs if you want a more representative population. My prior is that you would arrive at substantially more than a 10% downward adjustment.
Thanks for the thoughts Kartik!
(Speaking for myself; the 10% estimate comes from work I did at GiveWell but others at Open Phil and GiveWell may disagree with me)
I agree we shouldn’t dismiss consumer surplus entirely, and in retrospect would soften some of the wording in that doc – I think the irrationality point is important but not totalizing. The Nielsen idea is interesting and I’d like to think about it more. I think internalities are less bimodally distributed between people than your model, which muddies the waters, but I wonder if an analysis like that could still be informative.
Fwiw the program we funded is primarily focused on taxation, which is a nice mechanism to balance a recognition of externalities / internalities with a general prior towards personal choice. I’d estimate higher than 10% if that wasn’t the case. A focus on tax means the reduced consumption will be from the drinks for which people had the lowest willingness to pay, limiting lost consumer surplus.[1] It also results in increased tax revenue, so could be considered as trading off against alternative ways of raising tax revenue with their own deadweight loss in consumer surplus.
TBC, I recognize the inherent fragility / subjectivity of the 10% estimate and I suspect different people would come to quite different conclusions about what input to use, so I’d be excited to see more efforts to estimate this considering the broad sweep of evidence.
Of the two studies I could find on consumer surplus, the one which attempted to estimate consumer surplus from a marginal increase in price (rather than for typical consumption) estimates a loss of €58 million in consumer surplus, compared to a €700m improvement in “health, productivity, and non-financial welfare losses” (Anderson and Baumberg 2010, pg 34), implying an offsetting impact of ~8%. (Though I think there are a bunch of ways in which that study isn’t analogous to the models we use, including a higher estimate of non-health impacts, so difficult to know what to make of it).
This also raises a separate worry about the extent to which taxation affects heavy drinkers, where the marginal harm is likely highest, which we tried to account for separately in the effect size estimate.
Fair points, I agree that taxation has a lower bar. The bimodal point was illustrative, you could take some other individual characteristics as proxies for the extent of internalities (e.g. education) and weight people by that when estimating.