Research
Hans Olav Melberg
Conceptual problems with
studies of the social cost
of alcohol and drug use
Introduction
The literature on the social cost of substance
use dates back to the debates about prohibi-
tion in the early twentieth century (Fisher
1927; Österberg 1983). It is a controversial
field with some arguing that the methodology
is now “well accepted within the scientific
community” (Kopp & Fenoglio 2001) while
others argue that the calculations represent
“an exercise in hubris” (Reuter 1999). This
paper is located on the sceptical side of the
controversy and it makes three contributions
compared to previous research.
First of all it looks at how developments in
the economic theories of substance abuse af-
fect the debate. For instance, Ainslie’s work
on hyperbolic discounting and addiction is
important to the estimation of costs because
it undermines the assumption of stable pref-
erences (Ainslie 1992). This is important be-
cause costs are related to the satisfaction – and
lack of satisfaction – of preferences. If prefer-
ences are instable, then the estimation of cost
will differ depending on which of the prefer-
ences the researchers pick in the calculation.
submitted 15.01.2010;
initial review completed 22.01.2010
final version accepted 09.03.2010
NORDIC STUDIES ON ALCOHOL AND DRUGS
report
ABSTRACT
H. O. Melberg: Conceptual problems with
studies of the social cost of alcohol and
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
differ in their definition of costs and
the types of costs that are included
or excluded from the study. Closer
attention to the concept of cost
employed in these studies also reveals
some weaknesses with many of the
existing studies. The policy relevant
concept of cost necessarily implies a
comparison between all realistically
expected consequences (both positive
and negative) of two policy alternatives
and many cost studies do not use the
concept of cost in this way. Finally, it is
argued that cost estimates in this area
cannot be neutral or scientific because
the results depend on our views on
when a choice can be characterized
as voluntary and rational, how we
deal with the problem of inconsistent
preferences, and which preferences we
consider to be legitimate. Since there is
no agreed consensus on these issues,
the cost estimate necessarily becomes
subjective.
■ Keywords
Social costs, alcohol, illegal drugs,
definition of cost, cost of illness,
conceptual problems, revealed
preferences, weakness of will
V O L . 2 7 . 2 0 1 0   .  4 287
Conceptual problems with studies of
the social cost of alcohol and drug use
Second, the essay connects the litera-
ture on the cost of substance abuse to the
theoretical literature on the concept of
cost. The weak link between applied stud-
ies and theory has been noted in the ex-
isting literature, for instance by Atkinson
and Meade (1974), Markandya and Pearce
(1989), and Elleman-Jensen (1991). How-
ever, the mentioned articles focus mainly
on the distinction between social and pri-
vate costs as opposed to the definition of
cost itself. In classical economics the con-
cept of cost was very much debated (Bu-
chanan 1969). For some it was a measure
of pain associated with an alternative, for
others it measured what was sacrificed
when a choice was made. These debates
are interesting in themselves, and the two
conceptions of cost seem to clash also in
modern studies of the cost of substance
use, but the point of bringing this into the
discussion is not to re-run the old debates.
Instead, the point is to take the theory of
cost that became dominant – the “Austri-
an” opportunity cost concept – and exam-
ine the implications of this for the study
of the cost of substance use. As I show in
the second part of this paper, such a theo-
retical investigation makes it easier to un-
derstand the different answers found in
the empirical studies. Some, for instance,
only try to estimate external costs, while
others try to estimate social costs. Closer
attention to the concept of cost, however,
also reveals some weaknesses with many
of the existing studies. I shall argue that
the policy relevant concept of cost neces-
sarily implies a comparison between all
realistically expected consequences (both
positive and negative) of two policy alter-
natives and that several cost studies did
not use the concept of cost in this way.
288 NORDIC STUDIES ON ALCOHOL AND DRUGS
However this is only one of several prob-
lems and although using the correct cost
concept would be an improvement, it does
not prevent other problems with cost stud-
ies which are discussed below.
Third, and most importantly, this pa-
per draws more heavily than is usual on
the philosophical literature on the nature
of self, free choice and legitimate prefer-
ences (Elster 1986). This is important be-
cause cost estimates will differ depending
on whether one views the consumption of
drugs as a disease or a free and informed
choice and whether we exclude some pref-
erences from the calculation of costs and
benefits. It is also important because some
economists working on the topic tend to
assume away or ignore these problems.
For instance, in an otherwise excellent
critique of cost studies in the related field
of gambling Walker and Barnett (1999) ar-
gue that it is important to understand the
economics of costs since this “removes the
subjectivity in the classification of patho-
logical gambling costs.” I question this
conclusion by investigating some of the
underlying philosophical problems such
as free will, rational choice, weakness of
will and legitimate preferences.
Taken together these arguments imply
that many existing cost studies are of little
use. They do not agree with each other, they
use a policy irrelevant concept of cost and
in any case the conclusion reflect more an
opinion than a neutral estimate of a fact.
The conclusion however is not all negative.
While it may be useless to aggregate all the
costs to a single estimate of social costs,
some of the less aggregated information is
useful for policy purposes. For instance, for
the purpose of making well informed policy
decisions it is useful to know more about
V O L . 2 7. 2 0 1 0   .  4

the causal affects of drugs and alcohol on
the tendency to commit crimes or to incur
various illnesses. It is less obvious that it is
useful to convert all of these consequences
to monetary units and aggregate them.
Different studies
– different cost categories
In this section I want to give some exam-
ples of cost-studies and how they differ.
The aim is mainly descriptive. In other
words, I want to point out a few areas of
disagreement and the issues involved
without necessarily taking a position on
who is right or wrong. The aim is not to
be comprehensive and the focus is mainly
on the cost of illegal drugs. For a broader
overview of different cost studies and vari-
ous approaches, the reader is referred to,
for instance, Collins and Lapsley (1991),
Culyer et al. (2002), Robson and Single
(1995), and Single et al. (2003). The inter-
ested reader may also consult, for instance,
Xie et al. (1999), Harwood et al. (1999) and
Manning et al. (1989) for an introduction
to the various approaches and a discussion
of some of the issues I have left out (inci-
dence vs. prevalence vs. demographic ap-
proach; human capital vs. willingness to
pay method; and discount rates).
The exclusion of some topics does not
imply that they are insignificant. There
is, however, an important difference be-
tween empirical and conceptual prob-
lems. Empirical problems are less damag-
ing in the sense that they can be reduced
by improved data collection and statisti-
cal methods. Conceptual disagreements
might also be reduced through discussion
(e.g. by pointing out logical inconsisten-
cies), but they might also reflect deeper
differences that are unresolved even after
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
rational deliberation. If the latter is the
case, no amount of empirical sophistica-
tion and advance will help in producing
a scientifically valid estimate of the cost
of substance abuse. Hence, the main ques-
tion below is what to include in an esti-
mate of the social cost of substance use,
not the problems involved in the actual
measurement.
At a general level the cost categories of
many studies in this field can be catego-
rized under four headings: 1. Lost earn-
ings; 2. Crime/Law enforcement; 3. Health
(Treatment – direct and indirect, preven-
tion, research); and 4. Other effects (ac-
cidents, administration). However, as the
discussion below shows, there is consider-
able and significant disagreement both on
the general categories and on which costs
should be included under the headings.
As an example, consider Harwood et
al.’s estimate of the costs of alcohol and
drug abuse in the US in 1992 (Harwood
1999). According to this study “In 1992
the economic cost to society from alcohol
and drug abuse was an estimated $246
billion.” The largest cost category in the
study is “Lost Earnings” which represents
72% of all costs. Clearly, if one disagrees
with the inclusion of this category, the cost
estimate will change significantly. For in-
stance, Healey et al. (1998) argue that lost
earnings should not be included in the es-
timate of social cost.
The study by Healey et al. (1998) can also
be used to illustrate a second point of disa-
greement. It was based on a sample of 1075
drug users and the conclusion was that
each user cost society about £17 000. Crime
represented 78% of these costs and the rest
was mainly health care costs. One of the
reasons crime turned out to be so costly in
V O L . 27. 2010  .  4 289
Conceptual problems with studies of
the social cost of alcohol and drug use
Table 1. Some controversial cost categories
Cost category Importance *
Lost earnings 72%
Value of stolen goods 61%
Cost of drugs itself 35%
Human suffering 45%
* Change in estimate if the category is excluded.
that study, was that Healey et al. – unlike
Harwood et al. – included the value of the
goods stolen as a cost of crime (61% of the
total costs). Hence, whether we should in-
clude the value of stolen goods represents a
second point of disagreement.
A third example of a contested cost-catego-
ry is the money spent on drugs and alcohol.
In the context of drugs, Collins and Lapsley
(1991) include these outlays in the cost esti-
mate since in the words of Robson and Sin-
gle (1995): “the consumer does not receive
a benefit equal to the cost of the product.”
This is no small issue since the cost of drugs
represented more than one third of the total
costs in the mentioned study. Many other
studies – for instance Single et al. (1998) –
do not include this cost.
As a final example of categories that
cause problems, consider Kleiman’s (1999)
suggestion that we should include human
suffering as a cost category. The argument
against doing so is usually that it is impos-
sible to measure human suffering in dol-
lars. Kleiman is clearly aware of this but
he seems to believe that it is at least possi-
ble to derive some kind of lower bound on
the cost of human suffering. Assume that
suffering can be measured by willingness
to pay (to avoid the suffering) and that eve-
ry addict is willing to pay $10 000 every
year to stop the habit or that he/she has
ten people (friends/family) who are will-
290 NORDIC STUDIES ON ALCOHOL AND DRUGS V O L . 2 7. 2 0 1 0   .  4
Included in … Not included in …
Harwood et al. (1999) Henley et al. (1998)
Healey et al. (1998) Single et al. (1998)
Collins and Lapsley (1991) Harwood et al. (1999)
Kleiman (1999) Single et al. (1996)
ing to pay $1000 each. Assume, moreover,
that about 10% of the population have a
problematic relationship with alcohol or
drugs. Then human suffering amounts to
about $200 billion i.e. an increase of 81%
on Harwood’s estimate.
In short, different studies and different
authors use very different cost categories
when estimating costs and these differenc-
es produce very different estimates (Table
1). Given this confusion one is forced to
ask: Who is right and who is wrong?
The concept of cost
In this section I shall argue that a closer
look at the concept of cost itself can re-
duce some of the confusion from the first
section. I shall also argue that many of the
studies are weakened by the failure to use
a realistic alternative when they compare
a “world with drugs” to a “world of no
drugs.”
In everyday language cost often means
monetary outlays, but in economics cost is
defined as the value of the next best alter-
native. For instance, in Figure 1, the cost
of policy A is the (expected) value of the
(best) alternative we have to give up in or-
der to do A. This opportunity concept of
cost avoids the problem of counting only
direct monetary outlays since it includes
all the consequences that are relevant –
monetary and non-monetary.

One problem with the concept of op-
portunity costs is that it often involves a
comparison between hypothetical alter-
natives. We do not know exactly what we
have to sacrifice in order to do A. Tech-
nically speaking we have to compare a
policy (A) against a hypothetical counter-
factual: What would have happened if not
A? To answer this we must use a model
that allows us to work out the expected net
sum of positive and negative consequenc-
es measured in the same unit. Only then
can we work out what we sacrifice by not
choosing A.
Does the concept of cost used in cost-
of-illness studies conform to the ideal?
Although they often pay lip service to the
idea of opportunity cost, they fail to use
the correct alternative for comparison. The
basic structure of most studies of the social
costs of substance use is to measure the
monetary value of a situation with drugs
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-
come we could have had if there were no
addiction since in this world (they argue)
there would be less crime, fewer people in
prison, more people working and reduced
health expenses. Many only add those var-
iables which will make the total income in
the imagined world higher although this is
clearly wrong since the concept of cost –
as explained above – requires comparison
of the total sum of positive and negative
changes (see Figure 1).
In order to be useful the concept of cost
not only has to compare the net effect of
two alternatives, but the comparison also
has to be between realistic alternatives. To
formalize the problem slightly, consider
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
Figure 1. Cost as the sum of positive
and negative effects of an alternative
Positive Negative Total
20
A B
15
10
5
0
–5
–10
Note: Each policy alternative (A and B) has some
negative and positive consequences. The cost of
choosing one alternative is represented by the height
of the “total” of the other alternative, not the size of
the negative effects. In this example, project A is
clearly more costly, but it is still the one we would
choose because­the cost is more than balanced by the
positive­effects. The cost of choosing A would then be
the height of “total” in B.
the illustration in Figure 2. The horizontal
axis measures the number of users of a sub-
stance. The government can try to reduce
the number of users and this will reduce
the external cost as a result of abuse (crime
and health costs), but it requires higher
control costs (police, prison, treatment).
When we try to estimate the opportunity
cost we should – by definition – compare
realistic and possible worlds. Cost of ill-
ness studies assume a world of no users
(U = 0 in the figure) and elimination of all
control costs (zero control costs at U = 0).
This is clearly unrealistic. To achieve U =
0 we are required to spend resources on
control efforts and if we do not include
these costs the resulting gap between a
V O L . 27. 2010  .  4 291
Conceptual problems with studies of
the social cost of alcohol and drug use
Figure 2. Control costs, external costs and the optimal level of control
Costs Optimal level of control
1.2
1
0.8
0.6
0.4
0.2
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
drugs” cannot be labelled as a cost.
Except for Godfrey et al. (2002) few stud-
ies in the literature distinguish between
control costs and external costs. One might
ignore this if the costs were small, but
there is strong indication that the control
costs are substantial. For instance, in the
US it has been argued that the control costs
are four times larger than the cost of the
drug itself (Robinson & Scherlen 2007). Al-
though these estimates are controversial,
there is little doubt that the sums are sub-
stantial enough to justify conceptual sepa-
ration and empirical estimation.
I have so far examined the concept of
cost as employed by economists and com-
pared this to the cost concept used in cost
of illness studies. However, I have said lit-
tle about the second part of the title, i.e.
what the phrase “to society” implies for
292 NORDIC STUDIES ON ALCOHOL AND DRUGS V O L . 2 7. 2 0 1 0   .  4
External costs
Control costs
Total costs
U*: That
level of abuse
which mini-
mizes total
costs
which cost categories we should include
in our estimation of social costs. Once
again it can be interpreted in at least two
different ways. First, one could say that
cost to society imply that we should in-
clude all the individuals in the society in
our study. If we do this, the theft of a car
does not represent a direct cost. As long as
we include everybody, the fact that a dif-
ferent person now controls the car is only
a transfer, not a loss. On the other hand
if we interpret cost to society as the cost
that non-users of drugs and alcohol suffer
as a result of others’ use of drugs/alcohol
(external cost), then theft is a direct loss.
Hence, depending on the differences in
their interpretation of the phrase cost to
society, different studies tend to include
different cost categories.
The ambiguity in the phrase “to society”
is compounded by the failure of the litera-

ture to employ standard economic defini-
tions that could differentiate between dif-
ferent meanings of the phrase “to society.”
The standard definition is that social cost
is the sum of private costs and external
costs (Stiglitz & Walsh 2002; Varian 1992).
However, commonly in cost of illness
studies, and by their own admission, the
“definition of social costs correspond to
what economic theory usually calls ‘exter-
nalities’” (Kopp & Fenoglio 2001). For in-
stance, after claiming that “The social cost
of smoking tobacco is a subject … which is
littered with conceptual confusion, inap-
propriate measurement, and invalid infer-
ence”, Merkandya and Pearce (1989) goes
on to define social costs as follows:
“To the extent that the costs are know-
ingly and freely borne by the consumer
or producer himself, they are referred
to as PRIVATE COSTS but to the ex-
tent that they are not so borne but fall
on the rest of society, they are called
SOCIAL COSTS. Hence, the total cost
of any activity is the sum of the private
and the social costs.” (italics added)
Evidently, social costs is only a part of
the total costs in Merkandya and Peace,
while social cost in Kopp and Fenoglio
is the same as total costs. Clearly in this
literature people mean different things by
the same terms. Although confusing, this
realization is also clarifying because all
the different cost estimates are more un-
derstandable once it is realized that they
are measuring different costs. Some only
include the negative consequences, some
try to include all consequences, some fo-
cus on the consequences for the whole of
society, some only on the external costs.
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
One might argue that there is nothing in-
herently wrong with using different defi-
nitions. It is perfectly possible to make one
cost estimate in which one tries to meas-
ure the cost of drug use in general and
another in which one tries to measure the
cost of drugs to one sub-group of the popu-
lation. However, the terms social costs and
externalities have normative implications:
High social costs and negative externali-
ties are used as arguments for interven-
tion. Because of this it is important to be
aware that not everything that goes into the
definition of externalities on the wide in-
terpretation is equally uncontroversial in
terms of justifying intervention. The least
controversial are negative technological
externalities imposed on others which are
often accepted as grounds for intervention.
However, even with respect to technologi-
cal externalities, there is some controversy
as to whether there is enough information
to make an optimal intervention and what
type of intervention that is justified. Some
argue in favour of taxes or regulation,
while others – like Coase (1960) – argue
that the solution is to assign and enforce
property rights. Most agree, however, that
some form of intervention is desirable in
the case of large technological externali-
ties. A much weaker justification for in-
tervention is the type of externality that is
sometimes called internalities i.e. conse-
quences imposed on yourself which you
fail to consider, perhaps due to misleading
information. Morally there is an important
difference between costs imposed on oth-
ers and costs born by the actor himself. It
is easier to justify interventions to prevent
harm from one person on another, while
paternalistic policies aimed to prevent a
person from doing harm to herself are of-
V O L . 27. 2010  .  4 293
Conceptual problems with studies of
the social cost of alcohol and drug use
ten more difficult. Hence, the policy im-
plication of internalities is not on the same
footing as traditional externalities. Adding
the two together may produce a large sum,
but it would be misleading to present this
sum as a traditional externality and derive
policy implications based on this.
Closely related to the issue of “What do
we mean by social cost?” is another possi-
ble response to the question of social cost:
“Why do we want to know the social costs
of drugs?” This is an important question,
because different answers correspond to
different investigations. For instance, if
the aim is to find the tax rate that would
make the price of the substance reflect its
social cost, then only an estimate of the
external costs are relevant. Cost estimates
are sometimes used in this way. For in-
stance, in Journal of Economic Perspec-
tives Grossman et al. (1993) report that
cost estimates from the already mentioned
Harwood et al., imply that the price of a
alcohol should be increased from 35 USD
per gallon pure (average) to somewhere
between 70 and 80 USD per gallon.
Tax considerations do not justify cost
studies of illicit drugs, and in this case one
might retreat to the position that the aim is
not to be immediately useful but that the
question is of academic interest in the same
sense that curiosity makes us ask what the
US GDP would have been if the railway had
not been invented or if there had been no
slave trade. (Fogel 1964; Fogel & Engerman
1974) Even the topic of the deadweight loss
of Christmas has been honoured with eight
publications in the American Economic
Review, although nobody proposes to can-
cel Christmas (List & Shogren 1998; Ruffle
& Tykocinski 2000; Solnick & Hemenway
1996; 1998; 2000; Waldfogel 1993; 1996;
294 NORDIC STUDIES ON ALCOHOL AND DRUGS V O L . 2 7. 2 0 1 0   .  4
1998). Hence, one might argue that pure
academic curiosity may justify spending
time on the question of the social cost of
drugs. If this is the aim, however, one can-
not justify the common tendency to focus
only on the negative consequences of the
substance or the unrealistic counterfactual.
Indeed, it seems difficult to justify this fo-
cus unless the aim is simply to find a very
large estimate for political purposes. Policy
makers and lobbyists use cost estimates to
justify intervention and to fight for higher
budgets internally. For this purpose a high
sum is often deemed politically most inter-
esting which makes the focus on negative
consequences more understandable. From
an academic point of view, it is more prob-
lematic since cost estimates say nothing
about whether the costs can be reduced.
Moreover, when only the negative con-
sequences are included in the estimate it
does not even tell us whether it is desirable
to reduce the use of the substance. Hence,
the most commonly used method may pro-
duce numbers that are politically useful,
but not politically relevant from an eco-
nomic point of view.
Cost, free choice, multiple self
and acceptable preferences
There are at least three problems which
make the estimation of social costs de-
pendent on normative responses to diffi-
cult philosophical questions. In this sec-
tion these problems will be discussed un-
der the following headings: Uninformed
and involuntary actions, multiple self, and
legitimate preferences.
■ Uninformed and involuntary actions
Consider the inclusion of the cost of the
drug itself in the estimate of cost to society.

In standard economic theory it is left to the
consumer to evaluate whether something
is worth the cost (consumer sovereignty)
and the fact that they pay for it by defi-
nition demonstrates that they believe it is
worth the cost (revealed preference theo-
ry). If we then apply standard economic
reasoning, the money spent on drugs is
always balanced by the utility the person
gets from using drugs. Based on this line of
reasoning, one should not include the cost
of drugs as a social cost.
Against the standard account based on
consumer sovereignty and revealed prefer-
ences some argue that addiction is a dis-
ease or the act of taking drugs is involun-
tary or ill-informed. Because of this, they
argue, the consumers do not gain utility
from their consumption. This is an impor-
tant assumption since it makes a signifi-
cant difference in the cost estimate. For in-
stance, Collins and Lapsley (1991) include
30% of the expenditure on alcohol in the
estimation of social costs, arguing that this
is the percentage of alcohol consumption
that is consumed by addicts. Without this,
their estimate of the social cost of alcohol
would be 36% lower. Pogue and Sgontz’
(1989) discussion of the optimal tax rate
on alcohol in an economy with both light
and heavy users is another example of the
importance of the debate on disease, free
will and addiction. In their paper the op-
timal tax rate to cover the external costs of
alcohol is estimated to be six times higher
if alcohol is viewed as a disease compared
to conceiving it as an informed and vol-
untary choice. The reason for the large
difference is that viewing alcoholism as a
disease is assumed by the authors to im-
ply that alcoholics do not gain utility from
their consumption.
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
Simply labelling something a disease,
addictive, or ill-informed, however, is not
a good justification for deviating from the
standard approach. For instance, Husak
(1989) makes the following argument:
"… it may be contended that consum-
ers do not want, enjoy, or derive sat-
isfaction from recreational drug use.
This strategy will be dismissed by
economists who take wants as given
and make policy recommendations
designed to maximize the satisfaction
of existing consumer preferences. And
it is almost certain to be rejected by
philosophers familiar with the sleight-
of-hand that results from positing an
alleged 'rational will' and then sup-
posing that a person's 'true wants' can
be identified apart from his expressed
desires."
Husak is right to warn against the politi-
cal dangers of the conceptual distinction
between false and real selves, but the fact
that a conceptual distinction may have
undesirable political consequences, does
not imply that it is a false distinction.
Conceptually a preference is not the same
as a choice. For instance: A person is of-
fered the choice between an apple and an
orange. He selects the apple because he
believes that the orange is poisoned. If this
is a true description, then the inference
from "he selected the apple" to "he prefers
apples to oranges" is misleading. Thus,
there is not necessarily always a "sleight of
hand" involved when preferences are said
to exist separately from actions.
One might object that adherents of re-
vealed preference theory do not make this
obvious mistake since all they would ad-
V O L . 27. 2010  .  4 295
Conceptual problems with studies of
the social cost of alcohol and drug use
mit is that the action shows that “the in-
dividual prefers the joint alternative of ‘an
apple and being alive’ to the alternative of
‘getting an orange and being poisoned.’”
This argument is advanced, for instance,
by Dowding (2002). The problem, how-
ever, is that all we observe is the action.
We do not observe the beliefs and often we
do not know the full context of the action.
Hence, even on this approach one is forced
to admit that the inference from action to
preferences is not obvious. Dowding is
clearly aware of this, but he argues that
these practical problems do not invalidate
the theory of revealed preferences. This is
an interesting issue in itself, but the ad-
mission of practical problems is enough
to get the argument about possibly mis-
taken inference from observed actions to
preferences off the ground. One need not
agree or conclude that revealed preference
theory is wrong in order to discuss practi-
cal problems related to the inference from
actions to preferences. What is needed,
however, is a good justification for when
and how actions are misleading indicators
of preferences.
Mistaken beliefs are one of the factors
that could make actions deviate from the
underlying preferences we are interested
in. Pure accident is another, although this
is perhaps less interesting than a third
problem: involuntary actions. At first sight
this may seem like an oxymoron. To con-
vince the reader of the conceptual possi-
bility one might use the following exam-
ple: If the person selecting the apple did so
because a third person threatened to shoot
him if he went for the orange, then the ob-
served action cannot be translated into “he
prefers apples over oranges.” This may
seem like a silly example, but there are
296 NORDIC STUDIES ON ALCOHOL AND DRUGS V O L . 2 7. 2 0 1 0   .  4
several other less artificial examples of in-
voluntary actions. Following Elster (1999)
one might use the decision to sleep as an
illustration. Usually it is clearly voluntary,
but at some point you simply cannot help
yourself and you fall asleep whether you
want it or not (i.e. involuntary). There
might be grey cases in between and this
could lead us to conclude that instead
of using the dichotomous distinction be-
tween a free choice and an involuntary ac-
tion, we should use a continuum.
As shown by Sen’s attack on the use of
revealed preferences in economics theory,
there are many more cases in which it is
wrong to infer welfare relevant preferenc-
es from actions (Sen 1986). One of the ar-
guments briefly mentioned by Sen is that
the inference from choice to preferences
is invalid when the choice is not based
upon rational deliberation. To simplify
slightly we may use the following illustra-
tion: If I hit a person out of anger, then it
is wrong to treat that action as if it were
selected to express my preferences using
the process of rational and cold weighting
of costs and benefits. More problematic,
there are situations, such as the prison-
ers’ dilemma in game theory, in which it
would be wrong to generalize from actions
to preferences even after observing many
actions over time. Picking up on the same
theme Hausman (2000) has argued that the
"notion of 'revealed preferences' is unclear
and should be abandoned." Whether one
agrees or not, the statement at least shows
that not all economists simply equate ex-
pressed choice and preferences and work
from there.
Some of the disagreement between
economists working on the topic seems to
boil down to different conceptions of pref-

erences. Some argue that preferences are
defined by choice, not just revealed. For
instance, the approach in formal choice
theory is to define preference relations in
terms of choices (bets) made by agents. On
this approach no action can go against our
preferences. However, a preference can
also be viewed as one of several inputs
(such as beliefs and emotions) that gener-
ate an action. On this approach the prefer-
ence is not always defined by the action.
The distinction is important to welfare
economics because on the latter approach
preferences have some independent exist-
ence. This implies that before evaluating
a policy proposal we need to decode the
actions to find the pure preference. It was
precisely this claimed independent ex-
istence of pure preferences that inspired
Samuelson’s (1938) article on the concept
of revealed preferences. He was dismiss-
ive of the metaphysical concept of pref-
erences and wanted to base the theory of
consumption only on observable entities.
Once again, however, the practical dif-
ferences of the disagreements may be
smaller than the theoretical heat indicates.
Modern defenders of revealed preference
theory – like Dowding – argue that theory
does not apply to single acts or individu-
als, but that it is necessary for the analy-
sis of aggregates. On this point even those
who hold a more metaphysical conception
of preferences would agree that in general
it is useful to assume that actions reveal
the welfare-relevant preferences. They
would, however, claim that there might be
exceptions to the general rule even on an
aggregate level. Modern defenders of re-
vealed preference theory are not so naïve
that they do not understand these excep-
tions, the difference just being that they
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
claim that the exceptions have more to
do with incomplete description of prefer-
ences (and the context) than people acting
against their own preferences. Thus, both
approaches can at least in theory handle
the situations described above in which
the naïve inference from action to prefer-
ence is mistaken.
In sum, it is possible that observed ac-
tions do not directly demonstrate a pref-
erence in the sense that is relevant for
welfare evaluations. However, the mere
existence of possible exceptions does not
imply that drug use falls into either of the
categories above. The justifications for
deviating from the general presumption
that actions tend to indicate preferences,
were based on examples involving poor
information and degrees of involuntari-
ness. While it may be possible to claim
that some youths take drugs based on poor
information, it seems wrong to argue that
all recreational drug users are unaware of
the potential harmful side-effects of drugs.
It is more difficult to determine whether
regular and heavy drug use is an act of
free will. It may not be analogous to falling
asleep, but it may be argued that the habit
of drug use creates a desire so strong, or a
situation so restricted, that the scope for
choice is greatly reduced. However, once
again it seems difficult to argue that all
drug use falls into this category. At least
what Husak calls recreational drug use
does not have the compulsive nature that
would justify such an argument. Empiri-
cally one also observes many recreational
users who simply quit drugs which sug-
gests that there is room for choice.
The problem of free will does not only
apply to the cost of drugs itself. It also ap-
plies to the classification of costs into ex-
V O L . 27. 2010  .  4 297
Conceptual problems with studies of
the social cost of alcohol and drug use
ternal or private. Negative externalities are
sometimes defined as costs imposed on
others i.e. costs that are not voluntarily in-
curred by third parties. Based on this defi-
nition one might try to determine whether
the cost of enforcing laws on drugs and al-
cohol should be interpreted as an external-
ity. Clearly, some would argue, the costs
related to crime are costs imposed on the
non-users by the drug-users. Others might
argue that it is equally obvious that it is
the non-users who impose the laws that
make the use of drugs costly (both by mak-
ing drugs illegal and deciding the punish-
ment). In that sense, a large part of the cost
of crime is not an unavoidable externality
suffered by the non-users.
The same reasoning applies to the cost
of treatment. On the one hand, it is true
that non-users pay for treatment of drug
users – so it sounds like an externality. On
the other hand, it is often the non-users
who decide to provide and pay for treat-
ment and because of this it seems wrong to
label it an external cost. Society could de-
cide not to pay for treatment. Once again
the answer depends greatly on the defini-
tion of free will. If one adopts a definition
with a continuum, one might argue that
we do not have a fully free choice when
faced with a dying person who needs help.
If the same kind of reasoning can be ap-
plied to treatment, one might argue that
a portion of the treatment cost should be
considered an externality (correspond-
ing to the degree to which you believe
the non-users do not have a choice but to
provide treatment). One could of course
argue about the extent to which drug us-
ers are analogous to “people dying from a
deadly disease”, but this only highlights
the problem that the possibility of degrees
298 NORDIC STUDIES ON ALCOHOL AND DRUGS V O L . 2 7. 2 0 1 0   .  4
of freedom makes the analysis of external
and social costs very much dependent on
the researchers’ own views on what it is to
be “free” to do something.
■ Multiple self
Economist trained in the theories of ra-
tional choice may not be convinced by
the disease analogy or philosophical ar-
guments about free will. However, even if
we discard the disease theory, it does not
automatically follow that we must include
all the utility from consuming drugs as a
benefit. One might, for instance, argue that
people have inconsistent preferences as
a result of a split between a long-run self
and a short-run self. In this case the an-
swer to whether the cost of drugs should
be included or not, depends on whether
you believe it is possible to talk about a
person being split between a false and true
self, and whether we should only count
what we perceive as the “true” self when
calculating costs.
To economists with rational choice in-
clinations, any talk of a split self may
initially sound too much like mysterious
Freudian theories of id, ego and superego.
There is, however, one way of looking at
it that may be convincing even to econo-
mists. All that is needed to find examples
of preference inconsistencies over time
in standard economic choice theory, is
to replace the assumption of exponential
discounting with hyperbolic discounting.
When making a choice individuals are as-
sumed to put less weight on payoffs that
are far away. Using exponential discount-
ing one might, for instance, decrease the
value of a future payoff by 3% every year
you have to wait. Hyperbolic discounting
is different in the sense that the individual

is not assumed to discount future payoffs
at a constant rate. This, in turn, leads to
situations in which we on Monday, Tues-
day and Wednesday are firmly committed
to do something, e.g. go to the dentist, but
that we change our minds on Thursday
once the alternative is close in time. Next
week the same pattern may repeat itself. It
has been argued that this kind of discount-
ing may explain why we yield to tempta-
tions – such as taking drugs – that look
good in the short run, but with damaging
long run consequences (Ainslie 1992).
Hyperbolic discounting creates a prob-
lem for the evaluation of costs since the
costs will differ depending on whether
one uses the preferences expressed by the
short-run self or the long-run self. One
possible answer would be to treat the pref-
erence expressed most of the time as an
expression of the true self, but for believ-
ers in consumer sovereignty it is not clear
why priority should be given to the long-
term self. Instead some economists have
suggested to split the person altogether
and simply let both selves count as if they
were different persons (Cowen 1993). To
my knowledge, however, no one has made
the logical extension of weighting the pref-
erences proportional to their intensity or
the length of time each preference was
held.
The proposal of treating preferences
as persons has been criticised by Sugden
(2004) for leaving us with “no preference-
based concept of welfare that applies
to the person as a continuing entity”. It
is slightly unclear what this means and
why it is a problem, but Sugden goes on
to present a radical solution to the prob-
lem of unstable preferences and welfare
evaluation. The aim is to redefine the no-
NORDIC STUDIES ON ALCOHOL AND DRUGS
Conceptual problems with studies of
the social cost of alcohol and drug use
tion of consumer sovereignty so that it
could work even when individuals have
inconsistent preferences. Instead of using
meta-rankings of preferences or relying on
theories of a split self to solve the problem,
Sugden argues that consumer sovereignty
should be reframed to focus on opportu-
nity as opposed to preference satisfaction.
This proposal, in turn, may be criticised
for placing too much emphasis on the val-
ue of having many opportunities and not
enough on their satisfaction. People may
not prefer to maximize only one of these,
preferring instead some kind of trade-off.
In short, the existence of inconsistent
preferences creates a problem for the es-
timation of costs. There is no universally
accepted solution to this, and any solution
will necessarily involve normative judge-
ments about true selves, and what is valu-
able in life, such as the relative value of
having many options versus more satisfac-
tion within fewer options.
■ Legitimate preferences
There is a third line of argument for the
subjectivity of cost estimates that does not
rely on judgements about free will or a the-
ory of a split person. The argument is sim-
ply that according to a set of criteria some
preferences are legitimate and others are
not in a calculation of costs. Consider the
following example: Many people dislike
seeing drug addicts in the street. Should
we count this as a cost to society? If we
insist on counting all kinds of preferences,
it seems impossible to avoid including this
as a cost. On the other hand, if the argu-
ment is generalized – say to skin-colour –
most people would strongly object if we
argue that an overview of the costs of im-
migration should include the dislike some
V O L . 27. 2010  .  4 299
Conceptual problems with studies of
the social cost of alcohol and drug use
people have for individuals with a differ-
ent skin-colour. This shows that it is pos-
sible to find examples of preferences that
most people agree should not be counted
in an analysis of costs and benefits, and
that it is not obviously wrong to discrimi-
nate between preferences. The mere pos-
sibility, however, does of course not imply
that the same logic can be applied to the
use of drugs. We must ask what it is that
makes us exclude some preferences and
whether this also applies to the prefer-
ence for drugs and alcohol. Since there is
no neutrally accepted theory of acceptable
preferences we are once again in the realm
of the subjective.
Being in the realm of the subjective does
not imply that it is impossible to have an
informed discussion or that we are free to
choose whatever position we want. The
conclusions must still be based on correct
information and valid logical reasoning.
Given the constraint of “informed reason”
we can ask whether it is possible to find a
set of criteria that excludes the preference
for drugs as illegitimate. For instance,
Goodin (1986) presents a list of “justifica-
tions for censoring utility functions.” The
list includes, for instance, the argument
that there is no moral obligation to respect
preferences based on incomplete informa-
tion. Many argue that addictive consump-
tion of drugs, alcohol and tobacco fall into
this category.
While it may seem initially plausible
that preferences based on poor informa-
tion should not be counted, the issue is
not obvious on second thoughts. For in-
stance, assume you experiment with drugs
without knowing that you might become
addicted. After some time you discov-
er that you find it difficult to stop using
300 NORDIC STUDIES ON ALCOHOL AND DRUGS
drugs. A very ethically conscious econo-
mist comes along and tells you that your
current preference for drugs should not be
counted since it can be traced back to poor
information. You then object that any cal-
culation should take into account the per-
son you are right now, not the kind of ideal
preferences you would have had if things
had been different. More generally, as ar-
gued by Cowen (1993): “Fully informed
preferences do not offer an Archimedean
point for value theory in a world of imper-
fect information.”
In sum, there is disagreement on the rel-
evance of incomplete information for the
evaluation of preferences. The disagree-
ment is inherent to the topic because it is
impossible to prove scientifically that one
position is correct. There may be scope for
rational reflection, but it is not certain that
it is possible to reach a reflective equilib-
rium that we all agree to. In the end we
may simply disagree on which preferences
to include or exclude. Since the estima-
tion of costs depends on the set of prefer-
ences we include, the cost estimates will
also differ depending on our views on the
issue of legitimate preferences. This is an
unavoidable problem and to argue that
“all preferences should be counted” is not
a solution. First of all, it is easy to find ex-
amples of preferences that are deemed un-
acceptable to almost everyone, in which
case the principle breaks down. Second,
the principle is itself normative. When
two people argue about which preferences
to include in a calculation of social costs,
the person arguing in favour of including
all preferences is advancing a normative
position in the same way that a person
arguing that some preferences should be
excluded.
V O L . 2 7. 2 0 1 0   .  4

To conclude this section: The calcula-
tion of the social costs of substance abuse
depends on the answer to philosophical
questions about free will and addiction,
the possibility of split selves and the mor-
al standing of different preferences. These
are issues with no clear answers, and it is
not plausible to expect neutral answers
to be forthcoming since the answers ul-
timately depend on normative positions.
For this reason the calculation will un­
avoidably be a subjective exercise where
different people arrive at different results
depending on their values.
Conclusion
There is disagreement on the elements that
should be included in a study of cost to
society. Some of this disagreement can be
solved by distinguishing between “cost
to society” and “external cost”. However,
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