FIGURE 12-1 Historical trends, federal taxes on beer, wine, and spirits 1950-2002, with tax per drink in 2002 dollars.

SOURCE: Adapted from the Bureau of Alcohol, Tobacco, and Firearms web site (2003) and the Bureau of Labor Statistics web site (2003).

value in, say, 1960, would require that it be increased by a factor of three. The same lack of adjustment to inflation has occurred at the state level. One result was a long steep slide in the prices of distilled spirits relative to the price of other goods. Beer prices also declined in inflation-adjusted terms until the early 1980s. Alcohol prices have kept roughly even with overall inflation since then. Overall, alcoholic beverages are far cheaper today than they were in the 1960s and 1970s.

Current excise taxes and prices are low not only by historical standards, but also and more importantly by the standard that prices (inclusive of tax) should reflect the full social cost of production and consumption: if an item is underpriced, then too much will be purchased and consumed. A much-cited study of the costs of heavy drinking by Willard Manning and his associates documented this gap between social cost and price (Manning et al., 1989). They used the economists’ normative framework, distinguishing between internal costs (those that are borne by the drinker and therefore presumably taken into account in the drinking decision) and external costs (inflicted by drinkers on bystanders and not therefore taken fully into account in the drinking decision). If the principle of consumer sovereignty is accepted, they argue, then it is only the external costs that are relevant for tax-policy purposes. On the basis of data from the mid-1980s, they found that the external cost per ounce of ethanol consumed was about 48 cents,