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Guide to Social Cost Benefit Analysis

Appendix 2: Example of a 'Rough' CBA

Proposal to impose a minimum price on alcoholic beverages

267.Suppose there was a proposal to impose a minimum price on alcoholic beverages, for example $1 per standard drink of alcohol, or to increase the excise duty on alcohol, and we want to do a back-of-the-envelope CBA (a fuller CBA was carried out by the Ministry of Justice (2012). That CBA is described and summarised in appendix 3).

Roughest CBA

Description of the proposal and alternative options

268.As outlined in Part 2 of this guide, the first step is to clarify what exactly the proposal is and what the alternatives are.

  • In this case the proposal is clear enough. $1 was chosen because that impacts on the cheaper kinds of drinks but not on medium or high priced drinks.
  • Apart from ‘do nothing', the other main obvious alternative is to increase the excise tax on alcohol. We might consider a 50% increase in the excise tax.

Who are the gainers and losers, and what are the costs and benefits

269.The general approach adopted here is to ignore the benefits and costs to the alcohol abuser, on the grounds that at the margin they are equal to each other. Only impacts on ‘other people’, including the government as representative of taxpayers, are taken into account. We conclude that the gainers are the following:

  • victims of alcohol-induced harm
  • general taxpayers who have to contribute less towards the costs of alcohol-induced crime
  • general taxpayers who will have to contribute less to health services (or who will be able to enjoy enhanced services as a result of the savings)
  • general taxpayers who will benefit from an increased income tax contribution if the policy leads to improved workplace productivity of alcohol abusers[20]
  • the rest of society who may benefit from increased voluntary work provided by some people who would not do so if affected by alcohol
  • under a regulated minimum price, the alcohol industry will initially get more revenue and profits. However, it seems reasonable to assume that those profits will quickly be competed away through product enhancements. It therefore seems reasonable that this benefit is close to zero.

270.The losers are:

  • Alcohol consumers who will lose some ‘consumer surplus' (refer to the diagram in figure 3 below), including the health benefits that may result from a modest level of consumption. Note that the diagram in figure 3 shows that much of the lost consumer surplus is in fact transferred to either the government or the industry. The net loss in consumer surplus is therefore only the deadweight loss triangle.
  • The alcohol industry who may have to write off some plant that may become surplus to requirements as a result of the drop in demand.

271.Construction of the above list of gainers and losers, or a list of benefits and costs, requires some care in order to ensure that we are measuring welfare impacts and not conformity with decision-makers’ objectives, to ensure comprehensiveness and to avoid double counting. We can therefore construct a benefit cost table as follows:

Cost benefit summary table

$m present value (PV)

Benefits Notes Option 1
Minimum price
Option 2
Increase in
excise duty
Reduction in alcohol-related harm to victims (including crime, traffic and domestic victims) (1)    
Reduction in the govt's cost of crime (a gain to taxpayers) (2)    
Reduction in cost of govt health and welfare services (a gain to taxpayers) (3)    
Tax from increased workplace productivity (a gain to taxpayers) (5)    
Value of increased voluntary work (6)    
Increased profits for alcohol industry (7) nil nil
       
       
Total      
Costs      
Loss in consumer surplus (all drinkers) (8)    
Alcohol industry loss of value (9)    
       
       
Total      
Results      
Net present value      

Notes

  • [20]Transfer payments such as taxes are normally excluded in a CBA, but in this case we assume that in their private benefit cost calculation, alcohol abusers do not take into account the after-tax component of the increased workplace productivity that results from reduced alcohol consumption. It therefore needs to be recognised here as a real resource benefit.
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