Measuring the net economic and social costs of a plausibly-addictive substance or behavior that people make moral judgments about is extremely difficult. Because of the addiction, we can't trust revealed preference, and because of social desirability bias, we can't trust stated preference. Without any reliable analytic technique, figuring out what's really going on is quite hard. So in the absence of widely agreed upon rigorous scientific research, people often default to their personal beliefs and judgments about what's really going on.
However, we can bound our uncertainty. We can measure what the total would be under various extreme simplifying assumptions, and then the true value must be somewhere in between.
Traditional economic techniques for measuring total social surplus are based on the assumption of forward-looking rational consumers and a non-addictive substance: people receive benefits from the thing, and take into account all harms they will personally suffer when deciding how much they will pay. In this case, the net benefit of the thing is consumer surplus
(utility gained minus market price), plus producer surplus (profit minus opportunity costs), minus externalities.
Traditional public health analysis assumes short-sighted consumers and a completely addictive substance: people receive no benefits from the thing, only consuming it to avoid withdrawal symptoms, and do not take into account any of their future health harms. In this case, the net benefit of the thing is zero minus all associated costs including health effects, externalities, and all of the money that consumers paid for the substance. (Technically the producer surplus should be a transfer, not a cost, but they rarely account for that.)
There are two other combinations. Consumers might be extremely shortsighted and purchasing a non-addictive substance. In this case, the net benefit of the thing would be the consumer surplus minus all measured costs including both externalities and the 'internalities' or the health effects the consumer will later suffer.
It's also possible that consumers are forward-looking but addicted: they only purchase the substance to avoid withdrawal symptoms, meaning they get no overall lifetime benefit from the thing, but they do take into account expected future harms to themselves when deciding how much they'll pay to avoid withdrawal symptoms. In this case, the net benefit would be zero minus the externalities and production costs.
This allows us to produce a two-axis table, where the axes are how forward-looking consumers are, and how addicted they are. For 100% forward-looking consumers, the only harms are the externalities, and for 0% forward-looking, all harms are measured. For 100% addicted consumers, no consumer surplus is counted, and for 0% addicted, we measure the consumer surplus using traditional economic techniques. You can then choose a spot on the table based on your beliefs about what's going on in people's minds.
To demonstrate, we can do very brief and simple analysis of alcohol in the USA:
I personally believe that (on a drink-weighted basis) alcohol consumers are 40% forward looking and 80% addicted. They are somewhat aware of the long-term health consequences, but haven't fully internalized most of them. And their behavior is determined mainly by habituation or withdrawal avoidance rather than rational pursuit of pleasure.
Obviously your beliefs may differ. So spend a few minutes thinking, and then once you've decided what you think reality looks like, you can pick a spot on the table I'm about to construct. Keep in mind that if you and your friends are relatively well-adjusted, in-control casual drinkers, your intuitions will be warped by your filter bubble. Most drinks are consumed by heavy drinkers.
Because I am doing this in my free time for fun and it wouldn't be fun to do a proper lit review, I grab data from the first paper I find online that seems credible, and use the following simplifying assumptions:
I assume that the only externalities are alcohol-caused crime and the costs to governments. All other costs are 'internalities' that only affect the consumer or their family unit and would be internalized by a rational agent. This means that while the total social costs of alcohol are about $250 billion, the external costs are about $100 billion (same source).
I assume that the producer surplus, i.e. economic profit, of the alcohol industry is roughly one-third of their accounting profit. (Note that in a fully competitive industry, producer surplus would be zero, so I'm assuming a bit of monopoly power, possibly driven by habit and brand loyalty) With a net profit margin of about 15%, this means that 5% of the money spent on alcohol is producer surplus. With total sales of about $250 billion, this is about $13 billion in producer surplus.
Data on consumer surplus of alcohol is much more sparse. The only semi-credible estimate that could be found in a lit review is
based on London drinkers, and shows that utility from drinking is 150% of the price paid. So assuming that American drinkers are similar to London drinkers, then the consumer surplus for fully-rational informed consumers (utility minus purchase price) would be about $125 billion per year.
If consumers are completely non-addicted and forward-looking, then alcohol consumption in the USA has net benefits of $38 billion per year ($125 CS, plus $13 PS, minus $100 externalities). But once you move any significant amount from pure rationality, the benefits disappear and are replaced with significant net costs.
Under my guess of
80% addicted and 40% forward looking, which was written down before I produced this table, net costs are about $350 billion a year. If we could magically get everyone to stop drinking, without suffering withdrawal costs, we'd see benefits valued at about a thousand dollars per person. Given that most of these costs come from problem drinkers, a hypothetical charity that managed to reduce binge drinking and alcohol addiction by 1% would generate benefits of about $3 billion a year.
Calculations are in this google sheet, feel free to copy it, and then enter other or better sources, or your own ranges or guesses for how addicted and forward-looking people are.
Edit 23 Apr: I just remembered/realized that the source I cited for alcohol harm did not fully monetize the life years lost. For a full analysis, you'd have to do that, and split them between the internalities and externalities. The main part of this post is the framework, so I'm leaving it as is, but please note that it underestimates the harms of alcohol by a lot.
