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close this bookAlcohol-Related Problems as an Obstacle to the Development of Human Capital (WB)
close this folderRole of government and policy options
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View the documentPolicy options


The World Health Organization defines alcoholism as a disease. One interpretation of this definition is that alcoholism prevents consumers from making rational decisions, in that an alcoholic is not free to choose whether or how much he will consume. If this is accepted, alcoholism, in and of itself, Is a market failure. There are other market failures associated with the consumption of alcoholic beverages. The three most notable, with respect to alcohol, are (i) externalities, (ii) lack of well-informed consumers, (iii) and public (non-excludable) goods. Government intervention to mitigate the effects of market failure is warranted, on efficiency grounds, when private markets fail to translate individual decisions based on private considerations into social values. However, even if the economy generates an efficient allocation of resources, government intervention may be justified to achieve a 'fair' distribution of utility. Nevertheless, efficiency is the primary criterion for government intervention in the case of alcohol. It must be emphasized that while distributional and market failure problems provide opportunities for government intervention, they do not require it.

The fact that alcohol abuse contributes to the death of more than 2 million people annually (a tragedy in and of itself) only identifies it as a policy priority. One might argue that the consumer's ignorance (either because alcohol is addictive or because a lack of information prevents the consumer from adequately assessing risks) causes the market to fail to society's detriment, and, therefore, public sector intervention is warranted. Intervention is not justified, however, unless we can assess actual outcomes when the public sector does or does not intervene. For example, if it could be determined that by increasing the drinking age to 21, government, or the Ministry of Health, could decrease the number of traffic accidents, then public sector intervention could be considered necessary and sufficient. Alternative strategies should be implemented not on the basis of the magnitude of the problem, but rather on the basis that social welfare maximization of rational consumers is impeded by the presence of the market failure and on the likelihood that the policy change will actually reduce mortality and morbidity attributable to alcohol consumption. Some of the interventions available to the public sector will be discussed in the following section.

In designing policies to maximize social welfare, it is clear that alcohol consumption and the related problems of mortality, morbidity, and the secondary effects need to be addressed. The need to address these problems is particularly salient given that people in the age groups 15-24 and members of the lower income groups are the most likely to experience problems related to intoxication. Younger people and the poor tend to have a higher discount value and therefore systematically underestimate the effects of alcohol consumption. Moreover, the lower income groups are often more susceptible to other risk factors and are, therefore, more likely to suffer a debilitating illness due to the over-consumption of alcohol. From a policy perspective, it is also more difficult to influence the behavior of these populations (young and poor) because they discount the future more than other groups of consumers. The following section will discuss a range of policy levers available to decision makers.