There have been wild debates surrounding the BERL report into the social costs of alcohol. I haven’t read the report, I haven’t read the replies, I have to admit I have been busy.
However, in one of Eric Crampton’s many posts on the issue I see that generally an externality from lost output, excessive unemployment, and forgone wages has been assumed in the discussions. I’m sorry but what?
The labour market is a market, how can we have an externality when there is a market with a market price (wages). Yes, alcoholics produce less, less of them are employed, and they tend to have lower wages – but this isn’t an externality it is part of the market process. They are paid less because their marginal product is lower, and they are willing to be paid less because the benefit they receive from consuming alcohol is sufficient compensation – this is a completely internalised decision for the drinker isn’t it, so where is the social cost.
And don’t say it is too the firm – the firm can set a lower wage because of the fact that the marginal product of this worker type is lower.
And if we are going to look at it in terms of society as a whole (which involves moving away from externality logic), sure having a lot of alcoholics lowers our “capacity to produce”, but given that this is the result of a maximising choice by individuals we can say that the benefit of drinking exceeds the cost of this lost production – the fact that people are doing all this drinking illustrates that the drinking is more highly prized among society as a whole than the output they could have produced.
As the ultimate goal of “production” is to lead to create outcomes that satisfy peoples preferences through consumption we can ultimately say that the forgone production is being consumed in an optimal way everytime an alcoholic has a drink – excellent, go alcoholics!
The only market failure I can think of stems from asymmetric information. A firm hires someone without knowing they are an alcoholic and agrees to pay a wage, through selection we could end up with an adverse selection problem. But I don’t really buy it, given that these attributes are partially observable, and future wage increases do help us push towards the market clearing price for alcoholic labour.
So convince me that there is an externality here …