Conclusion
This paper has considered the case for government intervention in the case of externalities and, in particular, in the case of alcohol externalities.
The paper assesses various mechanisms to address externalities. These mechanisms are institutional solutions, trade in rights to generate externalities, regulatory measures and Pigouvian taxes. The paper assesses these tools in the case of alcohol and concludes that institutional, trade and regulatory solutions are limited in their ability to address the externalities of alcohol.
A specific tax can be justified in the case of alcohol. The externalities are large and there is sufficient information on which to base a tax. Given the information constraints the specific tax must be applied uniformly across a range of units of consumption, rather than to particular individuals. Where an optimal uniform tax is imposed it is reasonable to assume that the amount of revenue collected by the government would be at least as large as the total externality.
In 1999/00 the amount of revenue collected from the tax on alcohol was $580 million. This is near the mid-point of the estimated bound of the external tangible costs of alcohol ($608 million). Thus the current rate of excise tax can be justified on externality grounds. As total external costs include a number of other intangible costs the total external costs are likely to be significantly more than the revenue collected. A case to increase the excise would need to show that these costs are significant and that tax was the best tool to address these costs.
