CHAPTER 4. 
THE SOCIAL COST OF ALCOHOLISM AND DRUG ABUSE

4.1        Introduction

            Alcoholism and drug abuse impose a substantial burden on individuals and on society as a whole.  Alcohol and illicit drug consumption are widespread in the United States (Saxe 1983 and Rice et al. 1991).  Heavy alcohol consumption and drug abuse are known to cause significant health problems.  Alcoholism leads to organ damage (particularly the liver), brain dysfunction, cardiovascular disease, and mental disorders.  Alcoholics have higher morbidity rates and lower life expectancy (by 10 to 12 years) than the average person in the United States (Saxe 1983).  The costs of alcoholism are not confined to the alcoholic.  Alcoholism is known to be a major factor in cases brought to family courts; divorce; automobile, home, and industrial accidents; crimes such as assault and spouse and child abuse.

            Similarly drug abuse has been linked with a number of diseases, most notably are sexually transmitted diseases (STDs) and human immunodeficiency virus (HIV).  French et al. (1996) identify 30 separate diseases thought to be influenced by drug abuse.  Drug abusers also impose high costs on society through their criminal activities.

            A number of studies have attempted to estimate the direct and indirect costs of alcoholism and drug abuse in recent years and their estimates are quite simply staggering.  The total social and economic costs from alcoholism and drug abuse include the use of medical resources, productivity losses, criminal justice costs, the cost to victims of crime, the pain and suffering of substance abusers and family members.  As discussed in chapter 2, the relevance of these types of costs depends on the viewpoint of the analysts.  There are different methods that can be used for estimating these costs so the overall estimates of the social costs of alcoholism and drug abuse will vary from study to study.

            The outline of this chapter is as follows.  In Section 4.2, we discuss the types of costs associated with alcoholism and drug abuse in some detail.  The following section discusses the methods that have been used to estimate these costs.

4.2              The Social Cost of Alcohol and Drug Abuse

      A number of researchers have attempted to estimate the national cost to society from alcohol and drug abuse (Cruze, et al. 1981; Harwood, et al. 1984; Rice, et al. 1990; Harwood, 2000).  All of these researchers agree that the fundamental concept that should be used in making these estimates is that of opportunity cost.  As noted in chapter 2, opportunity cost refers to the value of the next best opportunity foregone as a result of undertaking a particular activity.  In general, the opportunity cost of an activity tends to equal total expenditures on that activity if it occurs in a competitive market.  If the activity occurs in a non-competitive market, modifications may have to be made to market prices to bring them in line with “true” opportunity costs.  If the activity change does not involve a market transaction, then the opportunity cost may have to be imputed.

      While the general concept of opportunity cost is uniformly accepted, researchers disagree over which items to include in social cost calculations and whether some items should be counted as a cost or a benefit.  There is not a consistent theoretical framework for estimating the social cost of alcohol and drug abuse (French, Rachal, and Hubbard 1991). 

      Social cost researchers often fail to make a distinction between private, external, and social costs.  The private cost of an activity is that incurred by the individual (i.e., alcohol or drug abuser) engaging in the activity.  External cost is the economic burden imposed on non-participants as a result of the activity.  The social cost of the activity is simply the sum of the private and external cost after adjusting for transfers within society (French, Rachal, and Hubbard 1991).

      Economists generally assume that consumers are rational and that they will not engage in any activity unless the expected benefits are at least equal to the expected private costs.  In fact, the consumer’s willingness to pay (i.e., price) represents a lower bound estimate of the value of the benefits a consumer expects to receive from a good.  Many buyers receive an additional value over-and-above the money price they pay, which economists call their consumer surplus (Anderson 1992).  Studies of the social cost of alcohol and drug abuse do not recognize the private benefits associated with the consumption of these substances.  They do not include the actual amounts of money that consumers spend on alcohol and illicit drugs.  As currently estimated, social costs calculators implicitly assume that resources presently allocated to the production and distribution of alcohol and illicit drugs yield no benefits and therefore they should be reallocated to something else instead.  According to this view, the concept of social cost is inherently normative (French, Rachal, and Hubbard 1991).  It is not clear who decides when an activity becomes sufficiently dangerous and/or morally wrong to be classified as a social cost.  Since social cost researchers see no private or direct benefits in the consumption of alcohol or illicit drugs, they certainly do not consider the possibility of indirect benefits or positive externalities associated with such drugs.  For these reasons, social cost studies simply add up the estimated private or direct costs and the indirect or negative external costs for alcohol and illicit drug consumption.  They make no attempt to account for or to net out the social benefits associated with the consumption of alcohol and illicit drugs.  From an economist’s point of view, the estimated social costs of alcohol and drug abuse are upwardly biased and not economically meaningful because they ignore the social benefits associated with the consumption of these drugs (Anderson 1992).

4.3              The Social Cost Model

      According to French, Rachal, and Hubbard (1991), the social cost model is composed of three distinct steps.  The first step is to summarize and classify the adverse consequences of alcohol/drug abuse.  Both physical and mental health problems can be directly or indirectly linked to alcohol or drug abuse.  Alcohol and drug abuse can also lead to a variety of social problems affecting many levels of society.  Social problems could include crime, homelessness, lower education, drug testing, problems in schools, greater use of social services, greater use of criminal justice system, family problems, community disruptions, and averting behavior.

      The second step involves the transformation of the adverse consequences into the costs of alcohol/drug abuse.  The adverse health and non-health consequences of alcohol/ drug abuse lead to costs incurred by abusers and non-abusers (family, community, and society).  French et al. (1991) divide these costs into four overlapping categories:  tangible or intangible and private or external.  Private tangible costs are incurred by the individual drug abuser.  These costs include “out-of-pocket” medical-related costs, reduced earnings, property damage, incarceration costs, and costs of averting behavior.

      External tangible costs are incurred by the non-abusing population.  This includes abusers medical costs paid by others, crime-related costs in the form of property damage, medical care for injuries, and lost wages to crime victims, similar costs to victims of automobile or workplace accidents attributable to drug abuse.  Also, the accident or crime averting behavior costs of non-abusers, communities, schools, and businesses would be included in this category.

      The intangible costs of alcohol/drug abuse do not typically involve a market transaction or any type of direct payment.  They are characterized primarily by physical and mental pain and suffering.  Private intangible costs refer to the problems such as physical disability, depression, anxiety, isolation, loss of family and job, and other emotional distress incurred by abusers.  External intangible costs refer to the physical and mental pain and suffering inflicted on crime and accident victims and on family and community members by abusers.  French et al. (1991) present a very complete itemization of the potential consequences and costs of alcohol/drug abuse.  In the next section, we shall see that many of these costs are not included in the existing studies of the social costs of alcohol/drug abuse.

      The third and final step in the social cost model is to determine the method to be used to estimate the types of costs chosen to be included in the analysis.  Several methods can be used to estimate the different cost components of a social cost model, but no single method is capable of estimating all the cost elements of alcohol/drug abuse.  The cost elements are sensitive to the methods used to estimate them.  Initial estimates of the social cost of alcohol/drug abuse varied depending on the types of costs included in the model and the methods chosen to estimate them.  Over time the types of costs included and the methods for estimating them have become more standardized so that the estimated social costs of alcohol/drug abuse can be more easily compared.  In the next two sections, the most recent estimates of the social cost of alcohol and drug abuse in the United States and Canada will be presented and evaluated.

4.4              Estimates of the Social Cost of Alcoholism in the United States

      Estimates of the social costs of alcohol abuse in the United States have risen over time.  Rice, et al. (1990) estimated the cost to be $101.8 billion in 1985.  Harwood, Fountain, and Livermore (1998) placed the figure at $148,021 billion in 1992.  More recently, Harwood (2000) increased the figure to $184,636 billion in 1998.  Based on these estimates, we cannot conclude that the problem of alcoholism is becoming more acute.  Most of the increase in the estimated cost can be attributed to population growth and to increases in prices and wages (NIAAA 1991).

      Table 4.1 presents a breakdown in the social costs of alcohol abuse in the United States for 1992 and 1998.  Social cost researchers make a distinction between core costs and related costs of alcohol/drug abuse.  Core costs are those resulting directly from the illness, whereas other related costs are the costs of secondary, non-health effects of illness (Rice, et al. 1991).  Within each category, there are direct and indirect costs.  Direct costs are those for which payments are actually made, and indirect costs are those for which resources are lost.  This classification scheme leads to four general types of cost for alcohol/drug abuse.

      Direct core costs are mainly expenses incurred in the treatment of alcohol abuse-related illnesses.  Expenditures for alcohol abuse-related treatment, prevention, research, training, and insurance administration also are part of the direct core costs.  As shown in Table 4.1, the medical consequences of alcohol abuse account for approximately 9 to 10 percent  of the total social cost of alcohol abuse.  Specialty Alcohol Services account

Table 4.1  United States Social Costs of Alcohol Abuse: 

1992 Estimates and Updates for 1998

(Millions of current-year dollars)

^aHarwood, H.; Fountain, D.; and Livermore, G. (1998).  The Economic Costs of Alcohol and Drug Abuse in the United States 1992.  Report prepared for the National Institute on Drug Abuse and the National Institute on Alcohol Abuse and Alcoholism, National Institutes of Health, Department of Health and Human Services.  NIH Publication No. 98-4327.  Rockville, MD:  National Institutes of Health. 

http://www.nida.nih.gov/EconomicCosts/Index.html.

^bHarwood, H. Updating Estimates of the Economic Costs of Alcohol Abuse in the United States prepared by The Lewin Group for the National Institute on Alcohol Abuse and Alcoholism, 2000.

for roughly another 4 percent.  Overall, direct core costs account for about 13 percent of the total cost of alcohol abuse and this share has remained relatively constant for over a decade (Hein and Pittman 1989).

      Indirect core costs of alcohol abuse are those rising from mortality and morbidity.  Mortality costs are the value of lost productivity due to premature death resulting from illness.  Morbidity costs are the value of lost productivity by persons unable to perform their usual activities or to perform them at a level of full effectiveness due to illness.  Table 4.1 indicates that the indirect core costs account for 67 to 69 percent of the social costs of alcohol abuse.  Morbidity costs alone account for approximately 47 percent of total cost and mortality costs account for an additional 20 percent.

      Direct related costs include the costs of alcohol related motor vehicle crashes, crime, and social welfare administration and other (mainly fetal alcohol syndrome).  Collectively, the direct related costs account for approximately 14 percent of the total cost of alcohol abuse.

      Indirect related costs include time lost by crime and accident victims and productivity losses because of incarceration.  These costs account for only about 5 percent of the total cost of alcohol abuse, as shown in Table 4.1.

4.5              Estimates of the Social Cost of Drug Abuse in the United States

      The first study to examine the social cost of drug abuse was by Cruze et al. (1981).  The authors followed the methodological guidelines suggested by the Public Health Service (Hodgson and Meiners, 1979).  Harwood et al. (1984) improved the Cruze et al. methodology and examined more comprehensive data sets.  They included data on the incidence and prevalence of physical health problems, use of medical services, productivity and earnings, and crime effects associated with drug abuse.  Harwood et al. estimated the social cost of drug abuse to be $47 billion in 1980.  Of this, treatment alone accounted for $1.2 billion or 2.6 percent whereas reduced productivity amounted to $25.7 billion or 54.7 percent.

      In a later study, Rice et al. (1991) using method similar to Harwood et al. estimated the social costs of drug abuse to be $44.1 billion in 1985 and $58.3 billion in 1988.  By far, crime costs composed the largest share of the total costs.  Crime costs accounted for 73.7 percent of total costs in 1985 and 72.4 percent in 1988.

      The estimated social cost of drug abuse in the United States has continued to rise in the 1990s.  Table 4.2 presents the most recent estimates for 1992 and 1998.  According to the Executive Office of the President (2001), the social cost of drug abuse rose from $102.3 billion in 1992 to $143.4 billion in 1998.

      The social costs of drug abuse can be divided into four categories.  Direct core costs refer to payments made for the consequences resulting from illness.  As shown in Table 4.2, one component of the direct core cost of alcohol abuse is for Medical consequences, which totaled $5.6 billion dollars in 1992 and $5.7 billion dollars in 1998.  These figures represent only 5.43 percent and 3.99 percent of the total cost of drug abuse in the two years.  The second component of direct core cost is the outlays for drug abuse treatment, prevention, training, research and insurance administration listed under the category Specialty Drug Abuse Services in Table 4.3.  This category accounts for 5.15 percent of the total cost of drug abuse in 1992 and 4.98 percent in 1998.

      The indirect core cost of drug abuse is those resulting from lost productivity.  As shown  in Table 4.2, these consist of lost productivity due to the abusers premature death. 

Table 4.2

Social Costs of Drug Abuse in the United States

(Millions of current-year dollars)