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Research

Hans Olav Melberg


report

Conceptual problems with ABSTRACT

H. O. Melberg: Conceptual problems with


studies of the social cost studies of the social cost of alcohol and

of alcohol and drug use


drug use

■ Existing studies of the social cost


of substance abuse give very different
answers. Part of the reason for the
differences is that the contributions
Introduction differ in their definition of costs and
The literature on the social cost of substance the types of costs that are included
use dates back to the debates about prohibi- or excluded from the study. Closer
tion in the early twentieth century (Fisher attention to the concept of cost
1927; Österberg 1983). It is a controversial employed in these studies also reveals
field with some arguing that the methodology some weaknesses with many of the
is now “well accepted within the scientific existing studies. The policy relevant
community” (Kopp & Fenoglio 2001) while concept of cost necessarily implies a
others argue that the calculations represent comparison between all realistically
“an exercise in hubris” (Reuter 1999). This expected consequences (both positive
paper is located on the sceptical side of the and negative) of two policy alternatives
controversy and it makes three contributions and many cost studies do not use the
compared to previous research. concept of cost in this way. Finally, it is
First of all it looks at how developments in argued that cost estimates in this area
the economic theories of substance abuse af- cannot be neutral or scientific because
fect the debate. For instance, Ainslie’s work the results depend on our views on
on hyperbolic discounting and addiction is when a choice can be characterized
important to the estimation of costs because as voluntary and rational, how we
it undermines the assumption of stable pref- deal with the problem of inconsistent
erences (Ainslie 1992). This is important be- preferences, and which preferences we
cause costs are related to the satisfaction – and consider to be legitimate. Since there is
lack of satisfaction – of preferences. If prefer- no agreed consensus on these issues,
ences are instable, then the estimation of cost the cost estimate necessarily becomes
will differ depending on which of the prefer- subjective.
ences the researchers pick in the calculation. ■ Keywords
Social costs, alcohol, illegal drugs,
definition of cost, cost of illness,
submitted 15.01.2010; conceptual problems, revealed
initial review completed 22.01.2010 preferences, weakness of will
final version accepted 09.03.2010

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Conceptual problems with studies of
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Second, the essay connects the litera- However this is only one of several prob-
ture on the cost of substance abuse to the lems and although using the correct cost
theoretical literature on the concept of concept would be an improvement, it does
cost. The weak link between applied stud- not prevent other problems with cost stud-
ies and theory has been noted in the ex- ies which are discussed below.
isting literature, for instance by Atkinson Third, and most importantly, this pa-
and Meade (1974), Markandya and Pearce per draws more heavily than is usual on
(1989), and Elleman-Jensen (1991). How- the philosophical literature on the nature
ever, the mentioned articles focus mainly of self, free choice and legitimate prefer-
on the distinction between social and pri- ences (Elster 1986). This is important be-
vate costs as opposed to the definition of cause cost estimates will differ depending
cost itself. In classical economics the con- on whether one views the consumption of
cept of cost was very much debated (Bu- drugs as a disease or a free and informed
chanan 1969). For some it was a measure choice and whether we exclude some pref-
of pain associated with an alternative, for erences from the calculation of costs and
others it measured what was sacrificed benefits. It is also important because some
when a choice was made. These debates economists working on the topic tend to
are interesting in themselves, and the two assume away or ignore these problems.
conceptions of cost seem to clash also in For instance, in an otherwise excellent
modern studies of the cost of substance critique of cost studies in the related field
use, but the point of bringing this into the of gambling Walker and Barnett (1999) ar-
discussion is not to re-run the old debates. gue that it is important to understand the
Instead, the point is to take the theory of economics of costs since this “removes the
cost that became dominant – the “Austri- subjectivity in the classification of patho-
an” opportunity cost concept – and exam- logical gambling costs.” I question this
ine the implications of this for the study conclusion by investigating some of the
of the cost of substance use. As I show in underlying philosophical problems such
the second part of this paper, such a theo- as free will, rational choice, weakness of
retical investigation makes it easier to un- will and legitimate preferences.
derstand the different answers found in Taken together these arguments imply
the empirical studies. Some, for instance, that many existing cost studies are of little
only try to estimate external costs, while use. They do not agree with each other, they
others try to estimate social costs. Closer use a policy irrelevant concept of cost and
attention to the concept of cost, however, in any case the conclusion reflect more an
also reveals some weaknesses with many opinion than a neutral estimate of a fact.
of the existing studies. I shall argue that The conclusion however is not all negative.
the policy relevant concept of cost neces- While it may be useless to aggregate all the
sarily implies a comparison between all costs to a single estimate of social costs,
realistically expected consequences (both some of the less aggregated information is
positive and negative) of two policy alter- useful for policy purposes. For instance, for
natives and that several cost studies did the purpose of making well informed policy
not use the concept of cost in this way. decisions it is useful to know more about

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the causal affects of drugs and alcohol on rational deliberation. If the latter is the
the tendency to commit crimes or to incur case, no amount of empirical sophistica-
various illnesses. It is less obvious that it is tion and advance will help in producing
useful to convert all of these consequences a scientifically valid estimate of the cost
to monetary units and aggregate them. of substance abuse. Hence, the main ques-
tion below is what to include in an esti-
Different studies mate of the social cost of substance use,
– different cost categories not the problems involved in the actual
In this section I want to give some exam- measurement.
ples of cost-studies and how they differ. At a general level the cost categories of
The aim is mainly descriptive. In other many studies in this field can be catego-
words, I want to point out a few areas of rized under four headings: 1. Lost earn-
disagreement and the issues involved ings; 2. Crime/Law enforcement; 3. Health
without necessarily taking a position on (Treatment – direct and indirect, preven-
who is right or wrong. The aim is not to tion, research); and 4. Other effects (ac-
be comprehensive and the focus is mainly cidents, administration). However, as the
on the cost of illegal drugs. For a broader discussion below shows, there is consider-
overview of different cost studies and vari- able and significant disagreement both on
ous approaches, the reader is referred to, the general categories and on which costs
for instance, Collins and Lapsley (1991), should be included under the headings.
Culyer et al. (2002), Robson and Single As an example, consider Harwood et
(1995), and Single et al. (2003). The inter- al.’s estimate of the costs of alcohol and
ested reader may also consult, for instance, drug abuse in the US in 1992 (Harwood
Xie et al. (1999), Harwood et al. (1999) and 1999). According to this study “In 1992
Manning et al. (1989) for an introduction the economic cost to society from alcohol
to the various approaches and a discussion and drug abuse was an estimated $246
of some of the issues I have left out (inci- billion.” The largest cost category in the
dence vs. prevalence vs. demographic ap- study is “Lost Earnings” which represents
proach; human capital vs. willingness to 72% of all costs. Clearly, if one disagrees
pay method; and discount rates). with the inclusion of this category, the cost
The exclusion of some topics does not estimate will change significantly. For in-
imply that they are insignificant. There stance, Healey et al. (1998) argue that lost
is, however, an important difference be- earnings should not be included in the es-
tween empirical and conceptual prob- timate of social cost.
lems. Empirical problems are less damag- The study by Healey et al. (1998) can also
ing in the sense that they can be reduced be used to illustrate a second point of disa-
by improved data collection and statisti- greement. It was based on a sample of 1075
cal methods. Conceptual disagreements drug users and the conclusion was that
might also be reduced through discussion each user cost society about £17 000. Crime
(e.g. by pointing out logical inconsisten- represented 78% of these costs and the rest
cies), but they might also reflect deeper was mainly health care costs. One of the
differences that are unresolved even after reasons crime turned out to be so costly in

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Table 1. Some controversial cost categories


Cost category Importance * Included in … Not included in …
Lost earnings 72% Harwood et al. (1999) Henley et al. (1998)
Value of stolen goods 61% Healey et al. (1998) Single et al. (1998)
Cost of drugs itself 35% Collins and Lapsley (1991) Harwood et al. (1999)
Human suffering 45% Kleiman (1999) Single et al. (1996)

* Change in estimate if the category is excluded.

that study, was that Healey et al. – unlike ing to pay $1000 each. Assume, moreover,
Harwood et al. – included the value of the that about 10% of the population have a
goods stolen as a cost of crime (61% of the problematic relationship with alcohol or
total costs). Hence, whether we should in- drugs. Then human suffering amounts to
clude the value of stolen goods represents a about $200 billion i.e. an increase of 81%
second point of disagreement. on Harwood’s estimate.
A third example of a contested cost-catego- In short, different studies and different
ry is the money spent on drugs and alcohol. authors use very different cost categories
In the context of drugs, Collins and Lapsley when estimating costs and these differenc-
(1991) include these outlays in the cost esti- es produce very different estimates (Table
mate since in the words of Robson and Sin- 1). Given this confusion one is forced to
gle (1995): “the consumer does not receive ask: Who is right and who is wrong?
a benefit equal to the cost of the product.”
This is no small issue since the cost of drugs The concept of cost
represented more than one third of the total In this section I shall argue that a closer
costs in the mentioned study. Many other look at the concept of cost itself can re-
studies – for instance Single et al. (1998) – duce some of the confusion from the first
do not include this cost. section. I shall also argue that many of the
As a final example of categories that studies are weakened by the failure to use
cause problems, consider Kleiman’s (1999) a realistic alternative when they compare
suggestion that we should include human a “world with drugs” to a “world of no
suffering as a cost category. The argument drugs.”
against doing so is usually that it is impos- In everyday language cost often means
sible to measure human suffering in dol- monetary outlays, but in economics cost is
lars. Kleiman is clearly aware of this but defined as the value of the next best alter-
he seems to believe that it is at least possi- native. For instance, in Figure 1, the cost
ble to derive some kind of lower bound on of policy A is the (expected) value of the
the cost of human suffering. Assume that (best) alternative we have to give up in or-
suffering can be measured by willingness der to do A. This opportunity concept of
to pay (to avoid the suffering) and that eve- cost avoids the problem of counting only
ry addict is willing to pay $10 000 every direct monetary outlays since it includes
year to stop the habit or that he/she has all the consequences that are relevant –
ten people (friends/family) who are will- monetary and non-monetary.

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Conceptual problems with studies of
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One problem with the concept of op- Figure 1. Cost as the sum of positive
portunity costs is that it often involves a and negative effects of an alternative

comparison between hypothetical alter-


Positive Negative Total
natives. We do not know exactly what we 20
have to sacrifice in order to do A. Tech-
A B
nically speaking we have to compare a 15
policy (A) against a hypothetical counter-
factual: What would have happened if not 10
A? To answer this we must use a model
that allows us to work out the expected net 5

sum of positive and negative consequenc-


0
es measured in the same unit. Only then
can we work out what we sacrifice by not
–5
choosing A.
Does the concept of cost used in cost- –10
of-illness studies conform to the ideal?
Note: Each policy alternative (A and B) has some
Although they often pay lip service to the
negative and positive consequences. The cost of
idea of opportunity cost, they fail to use choosing one alternative is represented by the height
the correct alternative for comparison. The of the “total” of the other alternative, not the size of
the negative effects. In this example, project A is
basic structure of most studies of the social clearly more costly, but it is still the one we would
costs of substance use is to measure the choose because­the cost is more than balanced by the
positive­effects. The cost of choosing A would then be
monetary value of a situation with drugs the height of “total” in B.
to a world without drugs. To estimate how
a world of “no drugs” or “no alcohol”
would look like they use the current world
as a starting point. They then add the in- the illustration in Figure 2. The horizontal
come we could have had if there were no axis measures the number of users of a sub-
addiction since in this world (they argue) stance. The government can try to reduce
there would be less crime, fewer people in the number of users and this will reduce
prison, more people working and reduced the external cost as a result of abuse (crime
health expenses. Many only add those var- and health costs), but it requires higher
iables which will make the total income in control costs (police, prison, treatment).
the imagined world higher although this is When we try to estimate the opportunity
clearly wrong since the concept of cost – cost we should – by definition – compare
as explained above – requires comparison realistic and possible worlds. Cost of ill-
of the total sum of positive and negative ness studies assume a world of no users
changes (see Figure 1). (U = 0 in the figure) and elimination of all
In order to be useful the concept of cost control costs (zero control costs at U = 0).
not only has to compare the net effect of This is clearly unrealistic. To achieve U =
two alternatives, but the comparison also 0 we are required to spend resources on
has to be between realistic alternatives. To control efforts and if we do not include
formalize the problem slightly, consider these costs the resulting gap between a

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Conceptual problems with studies of
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Figure 2. Control costs, external costs and the optimal level of control

Costs Optimal level of control

1.2 External costs


Control costs
1
Total costs
0.8
U*: That
0.6
level of abuse
which mini-
0.4
mizes total
0.2 costs

0
0 0.2 0.4 U* 0.6 0.8 1

Level of abuse (Number of abusers)

Note: If we use the common framework, then the optimal level is always zero use, but when we include control
costs outlays (as we should according to the definition of cost) we find that the optimal level of use is not zero,
but U* (if the aim is to minimize cost).

“world with drugs” and a “world without which cost categories we should include
drugs” cannot be labelled as a cost. in our estimation of social costs. Once
Except for Godfrey et al. (2002) few stud- again it can be interpreted in at least two
ies in the literature distinguish between different ways. First, one could say that
control costs and external costs. One might cost to society imply that we should in-
ignore this if the costs were small, but clude all the individuals in the society in
there is strong indication that the control our study. If we do this, the theft of a car
costs are substantial. For instance, in the does not represent a direct cost. As long as
US it has been argued that the control costs we include everybody, the fact that a dif-
are four times larger than the cost of the ferent person now controls the car is only
drug itself (Robinson & Scherlen 2007). Al- a transfer, not a loss. On the other hand
though these estimates are controversial, if we interpret cost to society as the cost
there is little doubt that the sums are sub- that non-users of drugs and alcohol suffer
stantial enough to justify conceptual sepa- as a result of others’ use of drugs/alcohol
ration and empirical estimation. (external cost), then theft is a direct loss.
I have so far examined the concept of Hence, depending on the differences in
cost as employed by economists and com- their interpretation of the phrase cost to
pared this to the cost concept used in cost society, different studies tend to include
of illness studies. However, I have said lit- different cost categories.
tle about the second part of the title, i.e. The ambiguity in the phrase “to society”
what the phrase “to society” implies for is compounded by the failure of the litera-

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ture to employ standard economic defini- One might argue that there is nothing in-
tions that could differentiate between dif- herently wrong with using different defi-
ferent meanings of the phrase “to society.” nitions. It is perfectly possible to make one
The standard definition is that social cost cost estimate in which one tries to meas-
is the sum of private costs and external ure the cost of drug use in general and
costs (Stiglitz & Walsh 2002; Varian 1992). another in which one tries to measure the
However, commonly in cost of illness cost of drugs to one sub-group of the popu-
studies, and by their own admission, the lation. However, the terms social costs and
“definition of social costs correspond to externalities have normative implications:
what economic theory usually calls ‘exter- High social costs and negative externali-
nalities’” (Kopp & Fenoglio 2001). For in- ties are used as arguments for interven-
stance, after claiming that “The social cost tion. Because of this it is important to be
of smoking tobacco is a subject … which is aware that not everything that goes into the
littered with conceptual confusion, inap- definition of externalities on the wide in-
propriate measurement, and invalid infer- terpretation is equally uncontroversial in
ence”, Merkandya and Pearce (1989) goes terms of justifying intervention. The least
on to define social costs as follows: controversial are negative technological
externalities imposed on others which are
“To the extent that the costs are know- often accepted as grounds for intervention.
ingly and freely borne by the consumer However, even with respect to technologi-
or producer himself, they are referred cal externalities, there is some controversy
to as PRIVATE COSTS but to the ex- as to whether there is enough information
tent that they are not so borne but fall to make an optimal intervention and what
on the rest of society, they are called type of intervention that is justified. Some
SOCIAL COSTS. Hence, the total cost argue in favour of taxes or regulation,
of any activity is the sum of the private while others – like Coase (1960) – argue
and the social costs.” (italics added) that the solution is to assign and enforce
property rights. Most agree, however, that
Evidently, social costs is only a part of some form of intervention is desirable in
the total costs in Merkandya and Peace, the case of large technological externali-
while social cost in Kopp and Fenoglio ties. A much weaker justification for in-
is the same as total costs. Clearly in this tervention is the type of externality that is
literature people mean different things by sometimes called internalities i.e. conse-
the same terms. Although confusing, this quences imposed on yourself which you
realization is also clarifying because all fail to consider, perhaps due to misleading
the different cost estimates are more un- information. Morally there is an important
derstandable once it is realized that they difference between costs imposed on oth-
are measuring different costs. Some only ers and costs born by the actor himself. It
include the negative consequences, some is easier to justify interventions to prevent
try to include all consequences, some fo- harm from one person on another, while
cus on the consequences for the whole of paternalistic policies aimed to prevent a
society, some only on the external costs. person from doing harm to herself are of-

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Conceptual problems with studies of
the social cost of alcohol and drug use

ten more difficult. Hence, the policy im- 1998). Hence, one might argue that pure
plication of internalities is not on the same academic curiosity may justify spending
footing as traditional externalities. Adding time on the question of the social cost of
the two together may produce a large sum, drugs. If this is the aim, however, one can-
but it would be misleading to present this not justify the common tendency to focus
sum as a traditional externality and derive only on the negative consequences of the
policy implications based on this. substance or the unrealistic counterfactual.
Closely related to the issue of “What do Indeed, it seems difficult to justify this fo-
we mean by social cost?” is another possi- cus unless the aim is simply to find a very
ble response to the question of social cost: large estimate for political purposes. Policy
“Why do we want to know the social costs makers and lobbyists use cost estimates to
of drugs?” This is an important question, justify intervention and to fight for higher
because different answers correspond to budgets internally. For this purpose a high
different investigations. For instance, if sum is often deemed politically most inter-
the aim is to find the tax rate that would esting which makes the focus on negative
make the price of the substance reflect its consequences more understandable. From
social cost, then only an estimate of the an academic point of view, it is more prob-
external costs are relevant. Cost estimates lematic since cost estimates say nothing
are sometimes used in this way. For in- about whether the costs can be reduced.
stance, in Journal of Economic Perspec- Moreover, when only the negative con-
tives Grossman et al. (1993) report that sequences are included in the estimate it
cost estimates from the already mentioned does not even tell us whether it is desirable
Harwood et al., imply that the price of a to reduce the use of the substance. Hence,
alcohol should be increased from 35 USD the most commonly used method may pro-
per gallon pure (average) to somewhere duce numbers that are politically useful,
between 70 and 80 USD per gallon. but not politically relevant from an eco-
Tax considerations do not justify cost nomic point of view.
studies of illicit drugs, and in this case one
might retreat to the position that the aim is Cost, free choice, multiple self
not to be immediately useful but that the and acceptable preferences
question is of academic interest in the same There are at least three problems which
sense that curiosity makes us ask what the make the estimation of social costs de-
US GDP would have been if the railway had pendent on normative responses to diffi-
not been invented or if there had been no cult philosophical questions. In this sec-
slave trade. (Fogel 1964; Fogel & Engerman tion these problems will be discussed un-
1974) Even the topic of the deadweight loss der the following headings: Uninformed
of Christmas has been honoured with eight and involuntary actions, multiple self, and
publications in the American Economic legitimate preferences.
Review, although nobody proposes to can-
cel Christmas (List & Shogren 1998; Ruffle ■ Uninformed and involuntary actions
& Tykocinski 2000; Solnick & Hemenway Consider the inclusion of the cost of the
1996; 1998; 2000; Waldfogel 1993; 1996; drug itself in the estimate of cost to society.

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In standard economic theory it is left to the Simply labelling something a disease,


consumer to evaluate whether something addictive, or ill-informed, however, is not
is worth the cost (consumer sovereignty) a good justification for deviating from the
and the fact that they pay for it by defi- standard approach. For instance, Husak
nition demonstrates that they believe it is (1989) makes the following argument:
worth the cost (revealed preference theo-
ry). If we then apply standard economic "… it may be contended that consum-
reasoning, the money spent on drugs is ers do not want, enjoy, or derive sat-
always balanced by the utility the person isfaction from recreational drug use.
gets from using drugs. Based on this line of This strategy will be dismissed by
reasoning, one should not include the cost economists who take wants as given
of drugs as a social cost. and make policy recommendations
Against the standard account based on designed to maximize the satisfaction
consumer sovereignty and revealed prefer- of existing consumer preferences. And
ences some argue that addiction is a dis- it is almost certain to be rejected by
ease or the act of taking drugs is involun- philosophers familiar with the sleight-
tary or ill-informed. Because of this, they of-hand that results from positing an
argue, the consumers do not gain utility alleged 'rational will' and then sup-
from their consumption. This is an impor- posing that a person's 'true wants' can
tant assumption since it makes a signifi- be identified apart from his expressed
cant difference in the cost estimate. For in- desires."
stance, Collins and Lapsley (1991) include
30% of the expenditure on alcohol in the Husak is right to warn against the politi-
estimation of social costs, arguing that this cal dangers of the conceptual distinction
is the percentage of alcohol consumption between false and real selves, but the fact
that is consumed by addicts. Without this, that a conceptual distinction may have
their estimate of the social cost of alcohol undesirable political consequences, does
would be 36% lower. Pogue and Sgontz’ not imply that it is a false distinction.
(1989) discussion of the optimal tax rate Conceptually a preference is not the same
on alcohol in an economy with both light as a choice. For instance: A person is of-
and heavy users is another example of the fered the choice between an apple and an
importance of the debate on disease, free orange. He selects the apple because he
will and addiction. In their paper the op- believes that the orange is poisoned. If this
timal tax rate to cover the external costs of is a true description, then the inference
alcohol is estimated to be six times higher from "he selected the apple" to "he prefers
if alcohol is viewed as a disease compared apples to oranges" is misleading. Thus,
to conceiving it as an informed and vol- there is not necessarily always a "sleight of
untary choice. The reason for the large hand" involved when preferences are said
difference is that viewing alcoholism as a to exist separately from actions.
disease is assumed by the authors to im- One might object that adherents of re-
ply that alcoholics do not gain utility from vealed preference theory do not make this
their consumption. obvious mistake since all they would ad-

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mit is that the action shows that “the in- several other less artificial examples of in-
dividual prefers the joint alternative of ‘an voluntary actions. Following Elster (1999)
apple and being alive’ to the alternative of one might use the decision to sleep as an
‘getting an orange and being poisoned.’” illustration. Usually it is clearly voluntary,
This argument is advanced, for instance, but at some point you simply cannot help
by Dowding (2002). The problem, how- yourself and you fall asleep whether you
ever, is that all we observe is the action. want it or not (i.e. involuntary). There
We do not observe the beliefs and often we might be grey cases in between and this
do not know the full context of the action. could lead us to conclude that instead
Hence, even on this approach one is forced of using the dichotomous distinction be-
to admit that the inference from action to tween a free choice and an involuntary ac-
preferences is not obvious. Dowding is tion, we should use a continuum.
clearly aware of this, but he argues that As shown by Sen’s attack on the use of
these practical problems do not invalidate revealed preferences in economics theory,
the theory of revealed preferences. This is there are many more cases in which it is
an interesting issue in itself, but the ad- wrong to infer welfare relevant preferenc-
mission of practical problems is enough es from actions (Sen 1986). One of the ar-
to get the argument about possibly mis- guments briefly mentioned by Sen is that
taken inference from observed actions to the inference from choice to preferences
preferences off the ground. One need not is invalid when the choice is not based
agree or conclude that revealed preference upon rational deliberation. To simplify
theory is wrong in order to discuss practi- slightly we may use the following illustra-
cal problems related to the inference from tion: If I hit a person out of anger, then it
actions to preferences. What is needed, is wrong to treat that action as if it were
however, is a good justification for when selected to express my preferences using
and how actions are misleading indicators the process of rational and cold weighting
of preferences. of costs and benefits. More problematic,
Mistaken beliefs are one of the factors there are situations, such as the prison-
that could make actions deviate from the ers’ dilemma in game theory, in which it
underlying preferences we are interested would be wrong to generalize from actions
in. Pure accident is another, although this to preferences even after observing many
is perhaps less interesting than a third actions over time. Picking up on the same
problem: involuntary actions. At first sight theme Hausman (2000) has argued that the
this may seem like an oxymoron. To con- "notion of 'revealed preferences' is unclear
vince the reader of the conceptual possi- and should be abandoned." Whether one
bility one might use the following exam- agrees or not, the statement at least shows
ple: If the person selecting the apple did so that not all economists simply equate ex-
because a third person threatened to shoot pressed choice and preferences and work
him if he went for the orange, then the ob- from there.
served action cannot be translated into “he Some of the disagreement between
prefers apples over oranges.” This may economists working on the topic seems to
seem like a silly example, but there are boil down to different conceptions of pref-

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erences. Some argue that preferences are claim that the exceptions have more to
defined by choice, not just revealed. For do with incomplete description of prefer-
instance, the approach in formal choice ences (and the context) than people acting
theory is to define preference relations in against their own preferences. Thus, both
terms of choices (bets) made by agents. On approaches can at least in theory handle
this approach no action can go against our the situations described above in which
preferences. However, a preference can the naïve inference from action to prefer-
also be viewed as one of several inputs ence is mistaken.
(such as beliefs and emotions) that gener- In sum, it is possible that observed ac-
ate an action. On this approach the prefer- tions do not directly demonstrate a pref-
ence is not always defined by the action. erence in the sense that is relevant for
The distinction is important to welfare welfare evaluations. However, the mere
economics because on the latter approach existence of possible exceptions does not
preferences have some independent exist- imply that drug use falls into either of the
ence. This implies that before evaluating categories above. The justifications for
a policy proposal we need to decode the deviating from the general presumption
actions to find the pure preference. It was that actions tend to indicate preferences,
precisely this claimed independent ex- were based on examples involving poor
istence of pure preferences that inspired information and degrees of involuntari-
Samuelson’s (1938) article on the concept ness. While it may be possible to claim
of revealed preferences. He was dismiss- that some youths take drugs based on poor
ive of the metaphysical concept of pref- information, it seems wrong to argue that
erences and wanted to base the theory of all recreational drug users are unaware of
consumption only on observable entities. the potential harmful side-effects of drugs.
Once again, however, the practical dif- It is more difficult to determine whether
ferences of the disagreements may be regular and heavy drug use is an act of
smaller than the theoretical heat indicates. free will. It may not be analogous to falling
Modern defenders of revealed preference asleep, but it may be argued that the habit
theory – like Dowding – argue that theory of drug use creates a desire so strong, or a
does not apply to single acts or individu- situation so restricted, that the scope for
als, but that it is necessary for the analy- choice is greatly reduced. However, once
sis of aggregates. On this point even those again it seems difficult to argue that all
who hold a more metaphysical conception drug use falls into this category. At least
of preferences would agree that in general what Husak calls recreational drug use
it is useful to assume that actions reveal does not have the compulsive nature that
the welfare-relevant preferences. They would justify such an argument. Empiri-
would, however, claim that there might be cally one also observes many recreational
exceptions to the general rule even on an users who simply quit drugs which sug-
aggregate level. Modern defenders of re- gests that there is room for choice.
vealed preference theory are not so naïve The problem of free will does not only
that they do not understand these excep- apply to the cost of drugs itself. It also ap-
tions, the difference just being that they plies to the classification of costs into ex-

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ternal or private. Negative externalities are of freedom makes the analysis of external
sometimes defined as costs imposed on and social costs very much dependent on
others i.e. costs that are not voluntarily in- the researchers’ own views on what it is to
curred by third parties. Based on this defi- be “free” to do something.
nition one might try to determine whether
the cost of enforcing laws on drugs and al- ■ Multiple self
cohol should be interpreted as an external- Economist trained in the theories of ra-
ity. Clearly, some would argue, the costs tional choice may not be convinced by
related to crime are costs imposed on the the disease analogy or philosophical ar-
non-users by the drug-users. Others might guments about free will. However, even if
argue that it is equally obvious that it is we discard the disease theory, it does not
the non-users who impose the laws that automatically follow that we must include
make the use of drugs costly (both by mak- all the utility from consuming drugs as a
ing drugs illegal and deciding the punish- benefit. One might, for instance, argue that
ment). In that sense, a large part of the cost people have inconsistent preferences as
of crime is not an unavoidable externality a result of a split between a long-run self
suffered by the non-users. and a short-run self. In this case the an-
The same reasoning applies to the cost swer to whether the cost of drugs should
of treatment. On the one hand, it is true be included or not, depends on whether
that non-users pay for treatment of drug you believe it is possible to talk about a
users – so it sounds like an externality. On person being split between a false and true
the other hand, it is often the non-users self, and whether we should only count
who decide to provide and pay for treat- what we perceive as the “true” self when
ment and because of this it seems wrong to calculating costs.
label it an external cost. Society could de- To economists with rational choice in-
cide not to pay for treatment. Once again clinations, any talk of a split self may
the answer depends greatly on the defini- initially sound too much like mysterious
tion of free will. If one adopts a definition Freudian theories of id, ego and superego.
with a continuum, one might argue that There is, however, one way of looking at
we do not have a fully free choice when it that may be convincing even to econo-
faced with a dying person who needs help. mists. All that is needed to find examples
If the same kind of reasoning can be ap- of preference inconsistencies over time
plied to treatment, one might argue that in standard economic choice theory, is
a portion of the treatment cost should be to replace the assumption of exponential
considered an externality (correspond- discounting with hyperbolic discounting.
ing to the degree to which you believe When making a choice individuals are as-
the non-users do not have a choice but to sumed to put less weight on payoffs that
provide treatment). One could of course are far away. Using exponential discount-
argue about the extent to which drug us- ing one might, for instance, decrease the
ers are analogous to “people dying from a value of a future payoff by 3% every year
deadly disease”, but this only highlights you have to wait. Hyperbolic discounting
the problem that the possibility of degrees is different in the sense that the individual

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is not assumed to discount future payoffs tion of consumer sovereignty so that it


at a constant rate. This, in turn, leads to could work even when individuals have
situations in which we on Monday, Tues- inconsistent preferences. Instead of using
day and Wednesday are firmly committed meta-rankings of preferences or relying on
to do something, e.g. go to the dentist, but theories of a split self to solve the problem,
that we change our minds on Thursday Sugden argues that consumer sovereignty
once the alternative is close in time. Next should be reframed to focus on opportu-
week the same pattern may repeat itself. It nity as opposed to preference satisfaction.
has been argued that this kind of discount- This proposal, in turn, may be criticised
ing may explain why we yield to tempta- for placing too much emphasis on the val-
tions – such as taking drugs – that look ue of having many opportunities and not
good in the short run, but with damaging enough on their satisfaction. People may
long run consequences (Ainslie 1992). not prefer to maximize only one of these,
Hyperbolic discounting creates a prob- preferring instead some kind of trade-off.
lem for the evaluation of costs since the In short, the existence of inconsistent
costs will differ depending on whether preferences creates a problem for the es-
one uses the preferences expressed by the timation of costs. There is no universally
short-run self or the long-run self. One accepted solution to this, and any solution
possible answer would be to treat the pref- will necessarily involve normative judge-
erence expressed most of the time as an ments about true selves, and what is valu-
expression of the true self, but for believ- able in life, such as the relative value of
ers in consumer sovereignty it is not clear having many options versus more satisfac-
why priority should be given to the long- tion within fewer options.
term self. Instead some economists have
suggested to split the person altogether ■ Legitimate preferences
and simply let both selves count as if they There is a third line of argument for the
were different persons (Cowen 1993). To subjectivity of cost estimates that does not
my knowledge, however, no one has made rely on judgements about free will or a the-
the logical extension of weighting the pref- ory of a split person. The argument is sim-
erences proportional to their intensity or ply that according to a set of criteria some
the length of time each preference was preferences are legitimate and others are
held. not in a calculation of costs. Consider the
The proposal of treating preferences following example: Many people dislike
as persons has been criticised by Sugden seeing drug addicts in the street. Should
(2004) for leaving us with “no preference- we count this as a cost to society? If we
based concept of welfare that applies insist on counting all kinds of preferences,
to the person as a continuing entity”. It it seems impossible to avoid including this
is slightly unclear what this means and as a cost. On the other hand, if the argu-
why it is a problem, but Sugden goes on ment is generalized – say to skin-colour –
to present a radical solution to the prob- most people would strongly object if we
lem of unstable preferences and welfare argue that an overview of the costs of im-
evaluation. The aim is to redefine the no- migration should include the dislike some

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Conceptual problems with studies of
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people have for individuals with a differ- drugs. A very ethically conscious econo-
ent skin-colour. This shows that it is pos- mist comes along and tells you that your
sible to find examples of preferences that current preference for drugs should not be
most people agree should not be counted counted since it can be traced back to poor
in an analysis of costs and benefits, and information. You then object that any cal-
that it is not obviously wrong to discrimi- culation should take into account the per-
nate between preferences. The mere pos- son you are right now, not the kind of ideal
sibility, however, does of course not imply preferences you would have had if things
that the same logic can be applied to the had been different. More generally, as ar-
use of drugs. We must ask what it is that gued by Cowen (1993): “Fully informed
makes us exclude some preferences and preferences do not offer an Archimedean
whether this also applies to the prefer- point for value theory in a world of imper-
ence for drugs and alcohol. Since there is fect information.”
no neutrally accepted theory of acceptable In sum, there is disagreement on the rel-
preferences we are once again in the realm evance of incomplete information for the
of the subjective. evaluation of preferences. The disagree-
Being in the realm of the subjective does ment is inherent to the topic because it is
not imply that it is impossible to have an impossible to prove scientifically that one
informed discussion or that we are free to position is correct. There may be scope for
choose whatever position we want. The rational reflection, but it is not certain that
conclusions must still be based on correct it is possible to reach a reflective equilib-
information and valid logical reasoning. rium that we all agree to. In the end we
Given the constraint of “informed reason” may simply disagree on which preferences
we can ask whether it is possible to find a to include or exclude. Since the estima-
set of criteria that excludes the preference tion of costs depends on the set of prefer-
for drugs as illegitimate. For instance, ences we include, the cost estimates will
Goodin (1986) presents a list of “justifica- also differ depending on our views on the
tions for censoring utility functions.” The issue of legitimate preferences. This is an
list includes, for instance, the argument unavoidable problem and to argue that
that there is no moral obligation to respect “all preferences should be counted” is not
preferences based on incomplete informa- a solution. First of all, it is easy to find ex-
tion. Many argue that addictive consump- amples of preferences that are deemed un-
tion of drugs, alcohol and tobacco fall into acceptable to almost everyone, in which
this category. case the principle breaks down. Second,
While it may seem initially plausible the principle is itself normative. When
that preferences based on poor informa- two people argue about which preferences
tion should not be counted, the issue is to include in a calculation of social costs,
not obvious on second thoughts. For in- the person arguing in favour of including
stance, assume you experiment with drugs all preferences is advancing a normative
without knowing that you might become position in the same way that a person
addicted. After some time you discov- arguing that some preferences should be
er that you find it difficult to stop using excluded.

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To conclude this section: The calcula- this distinction is not enough for meaning-
tion of the social costs of substance abuse ful estimation since the concept of cost
depends on the answer to philosophical necessarily implies a comparison between
questions about free will and addiction, all the realistically expected consequences
the possibility of split selves and the mor- (both positive and negative) of two policy
al standing of different preferences. These alternatives and many studies did not use
are issues with no clear answers, and it is the concept of cost in this way. Finally, cost
not plausible to expect neutral answers estimates cannot be neutral or scientific
to be forthcoming since the answers ul- because they depend strongly on our
timately depend on normative positions. views on when a choice can be character-
For this reason the calculation will un­ ized as voluntary, whether we admit to the
avoidably be a subjective exercise where possibility of a split self, and which prefer-
different people arrive at different results ences we consider to be legitimate. Since
depending on their values. there is no universally agreed answer on
these issues, the cost estimate necessarily
Conclusion becomes subjective.
There is disagreement on the elements that
should be included in a study of cost to Hans Olav Melberg, Researcher
Department of Health Economics
society. Some of this disagreement can be
and Health Management,
solved by distinguishing between “cost University of Oslo and SIRUS, Norway
to society” and “external cost”. However, E-mail: h.o.melberg@medisin.uio.no

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