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Paternalism in economic garb: the embedded paternalism of social cost studies.

Social cost studies embed paternalism into the assumptions of the model, stifling democratic debate.

Eric Crampton

on 23 February 2012

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Transcript of Paternalism in economic garb: the embedded paternalism of social cost studies.

Hiding Nanny's Skirts
The embedded paternalism
of social cost studies

Dr. Eric Crampton
Department of Economics, University of Canterbury
Visiting Fellow, New Zealand Policy Unit, Centre for Independent Studies
We know what is best for you, your family, and your soul.

And we will make you choose it.
An Honest Paternalism
The modern approach
Or $36 billion, depending on who you ask
Alcohol costs the country $15 billion per year
Let's pretend the figures are usefully comparable
Alcohol excise revenues a third of alcohol's costs
Increase taxes, minimum pricing, opening hours, drinkers' licenses, nudges, soft paternalism...
So we must do something!
Economically meaningful measures of policy-relevant social cost must be net of benefits.

Collins & Lapsley present a "net" social cost figure...
Embedded paternalism
But they do it by assuming away any potential benefits!
"Thus, if the costs of substance use are to be classified as private costs, the following three conditions must be simultaneously satisfied:
1. The users are fully informed as to the costs which the substance use imposes upon themselves;
2. The users are required to bear the full (internal and external) costs of the consumption; and
3. The users make rational consumption decisions in the light of all the information available to them.
These requirements are extremely stringent, so stringent in fact that the conventional approach of treating all abuse costs as social costs is fully justified." - Single, Collins et al.
When private costs are deemed social...

$1.7 billion presumed spent by heavy or harmed drinkers;
About $4 billion in heavy drinkers' lowered life expectancy;
About $3.5 billion in heavy drinkers' reduced earnings from premature mortality;
A billion dollars in other car accident costs borne by the drink driver;
$300 million in prisoners' forgone earnings;
$400 million in drinkers' private spending on health care
But that's not all!
Double-counting of cost of lives lost with cost of forgone output
Questionable standards for "alcohol-caused crimes"
Implausible counterfactual earnings among prisoners
Healthcare: $1.6b (fiscal externality)
Crime: $1.1b
Road accidents: $0.7b
Labour costs: $0.2b
Loss of life: $0.2b
A more standard measure
Potentially plausible policy-relevant costs: $3.8b
"Alcohol abuse on its own costs the economy $15 billion a year - a massive cost to every single Australian and every single taxpayer."
- Bernard Ripoll, MP (Labor), 25 February 2009.
"Australia could save up to $15.3 billion a year if it cuts back on the booze"
- Courier Mail, 18 September 2008
"The annual social cost in Australia is estimated to be $15 billion. But there are greater economic costs to it as well. People do not go to work. People are injured."
- James Tournour, MP (Labor), 25 February 2009.
"the annual cost of the harm associated with drinking has now hit $15 billion and that's not to mention the lives lost."
- Julia Medew and Ian Munro, The Age 26 August 2009.
"the full financial burden of alcohol-related crime in Australia could be as much as $15 billion a year"
- NSW Police Commissioner Andrew Scipione cited by Steve Larkin, Sydney Morning Herald, 27 May 2008.
Fiscal Externalities
Basic economics:
Some externalities generate inefficiencies
Intervening to address externalities that aren't themselves inefficient generally induces inefficiency
Fiscal externalities:
Costs I impose on you through the tax system
Mostly a transfer, especially for inelastic goods
Little case for intervention
Remedying Fiscal Externalities
Identify all the margins and apply comprehensive taxes and subsidies
Very high transactions costs
Very intruisive

Abolish public health, give money to poor people, mandate private insurance.

Ignore them!
The timber of humanity is crooked
We all err, all the time, relative to a perfect rationality norm.
Cunning policy can exploit those imperfections to help us make "right" choices.

Behavioural economic theory is strongly contested.
But not so fast!
And who gets to decide what the "right choice" is anyway?
Lab versus Field
Regulators and nudgers are just as vulnerable to biased behaviour as the rest of us.
Comparative Institutional Analysis!
Only 5% of published articles in behavioural economics making policy recommendations considered policy-makers' potential biases.
Abyssmal track record
The more we expect the right choices to have been made for us, the less we learn to make choices.
Infantilisation and the abolition of agency
Full transcript