Matt I like your point about comparing assumptions to see which are more reasonable. But why the focus on these value judgments? I mean, what is it about BERL’s cost study that makes value judgments front and center of your attention? Can’t the same be asked of every single economic study?

My point is that the personal values of the author and the reader is not what makes an economic analysis interesting. It is the quality of thinking and the fit with reality that does this. Great economic papers are not great because people with the best values (whatever that means) like them. Its because there is some objective sense in which they add to understanding.

BERL’s report is poor because of its poor fit with reality. In fact it is positively misleading in many places. While I recognise that reasonable people will disagree, there is also a point at which an argument can be recognised as faulty without reference to any values. This can be established by reference to logic or to empirical evidence, for example. Personal values are a poor substitute for these alternative means of finding truth. As I noted in an example above, BERL’s p. 173 premise does not support the conclusion which follows.

I can buy having a number that includes a big whack of private costs if you never call that social costs or net costs and you never call it welfare and if you jump up and down and scream if anybody tries to use the number as something usefully compared with tax revenues because it’s manifestly wrong to use a gross cost measure in comparison with pigovean tax revenues.

I cannot buy having a number that includes all those private costs when you’ve specifically assumed that there are no private benefits and when you’re more than happy for Geoff Palmer to cite the difference between a huge gross costs number and excise tax revenues as being something that indicates taxes are too low.

It’s is total obfuscation to claim that benefits were outside of remit after having claimed that benefits are equal to zero and hinged the inclusion of private costs on that.

From p.173:

When measuring the social cost of harmful AOD use, known private costs should generally be excluded (Single et al 2003, Collins and Lapsley 2008). This is because private costs are offset by private benefits, so there is no net social cost. For example, a rational consumer buying alcohol is assumed to know the negative effects of drinking, and weighs the benefits and costs in making their decision. They will choose to consume up to the point where their benefit from consumption matches the full cost of consumption, which they bear privately. In the case of the fully informed rational consumer, the (net) social costs are zero.

So, the method they’re following says we cannot count private costs if there are offsetting private benefits.

In the case of harmful drug use, however, individual decisions are not necessarily made on a rational basis, that is, a decision where the consumer equates their costs and benefits. We argue that the consequences of irrational consumption decisions lead to private costs that are borne by the rest of society, and hence should be included as social costs.

Starting the argument for inclusion of the excess costs induced by irrationally-high consumption levels. I don’t see how irrationality is necessary to worry about externalities, but the rest of the paragraph makes clear that they’re really worried about internalities. Ok. But then we find

We assume that it is irrational to drink alcohol to a harmful level and that harmful alcohol use has zero private benefit. As such, the 50 percent of harmful alcohol consumption estimated in this study has no private benefit to match the private cost, resulting in a net social cost. These private decisions that lead to social costs are included in our estimates.

Again, I wouldn’t have a problem if they were trying to estimate net excess costs on the basis of excess irrational consumption having net costs to be weighed against prior consumer surplus. But then they wave their hands about benefits being outside of scope. If that’s the case, counting only external costs, or at least having a side tabulation of external costs and highlighting that as the important bit, is the appropriate next step I figure.

“I get worried when the defense of particular numbers shifts with the critique”

This is a very good point. I completely agree.

“BERL has not been debating the validity of assumptions; instead, they’ve obfuscated about what assumptions they were allowed to use in the RFP”

This seems like the essential point. The argument should be about “which assumptions seem better” at this point – and if it is true that they are avoiding this issue then I find that disappointing.

When I looked at Dr Nana’s article today I was quite disappointed by the attacks on rationality, and from what I’ve seen on your blog today your estimates don’t seem based on a super human rational agent.

Personally I would think that there is scope for the estimation of costs to differ – but what would be really cool is if the differing value judgments that defined the difference between the points of view could be distilled to a half page pdf.

As I’ve said, I personally find the lower cost scenario more “believable” – but this could be personal bias thanks to the fact that I’ve trained as an economist and drink excessively 😛

“BERL was asked to produce an estimate of economic costs”

I thought their task was to estimate total costs, surely these include a pile of value ladden social costs as well?

Revisting the idea of what a specific cost is is the very essence of what we should be doing – in order to understand what costs are relevant for policy and why.

From what I’ve seen Eric has said, ok even if we ignore the benefits (which he also says we shouldn’t when forming policy) the costs that have been estimated are too high. BERL replied by saying the difference in costs come from different value judgments – and as a result it is these issues that should be discussed.

Is the difference between BERL and Crampton what they assume about off-setting benefits?

Again, excuse my ignorance, being busy at work means I don’t get to see much more than the “he said/she said” being played out in the media.

Note also that the page 173 bit, laying it all out, is buried amidst reams of tables of sensitivity analysis. Exactly where you’d bury something you wanted nobody to notice. Section 9 “Appendix – method and calculation detail” runs pages 88-130. Then it’s section 10 “Additional tables”. That runs through page 172. Then there’s the single page confession at page 173 “11.1: Harmful drug use and irrational consumption decisions”, then p. 174 Appendix Table 33 (more sensitivity analysis), then page 175 where they note that a survey from GPs reveals that less than 1% of patients visiting doctors from 05-07 were identified as having an alcohol or other drug use problem: not their presumed 1/6 of all adults noted earlier.

BERL has not been debating the validity of assumptions; instead, they’ve obfuscated about what assumptions they were allowed to use in the RFP (“oh, we couldn’t count benefits, outside of remit, maybe somebody should pay us another $130K to look at benefits”), which assumptions they’ve actually used (private costs count as social because of an assumption of zero gross benefits, p. 173), and ignored the extent to which the latter materially affects their conclusions. Further, they’ve mischaracterised our approach as requiring perfect rationality always and everywhere, despite repeated refutation, and accused us of supporting murder.