Last week, we saw an overview of the calculation methods for the value of one life and some applications.
This week, we can see another type of application, this time in the intersection of social sciences, politics and economics.
I am sure that you have ever heard or read a conversation about the true cost and benefits of addiction for the budget of a country. In the case of tobacco or alcohol, this cartoon below may sum up the dilemma.
So are the addicts paying their fair share of not?
It is surprisingly easy to be imprecise about this question. Indeed, while we can easily find the taxes collected and the healthcare and public order spending, a simple subtraction of these numbers is actually missing the biggest part of the equation, what economists call “externalities”.
An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. An example of a negative externality is air pollution from a power plant in your village. Positive externalities also exist, for instance if your neighbours keep their houses in good check, this would improve not only the value of their houses but also yours.
A recent study by French economist Pierre Kopp is looking at the true social cost of the addictions in France.
Social cost is composed of the external cost and the cost for the public finances.
The cost for the public finances is straightforward and often what is used in the public debate. It opposes prevention spending, policing costs, healthcare spending to revenues represented by taxes and all the pensions and other benefits you would not get because you were dead earlier than expected.
The external cost is more complicated to assess. It is composed of the value of lost human lives, the cost of the lower quality of life, the productivity losses from addicted people. This cost will have wildly varying outputs given the difficulty to calculate precisely the value of one human life (see last week).
Once both costs are combined to form the social cost, the research shows that 95% of the social cost comes from the external factor for alcohol, 85% for tobacco and 67% for drugs.
Therefore, when you listen to a basic conversation about cost and benefits of addictions, it is likely that it is omitting more than 80% of the problem!
Alcohol and tobacco have the same social cost, the study find, at around €120bn each in the case of France, or nearly 5% of GDP for each problem. Out of these €120bn, more than 50% are represented by the value of all the lives lost. These lives were worth €113,000pa according to the new French calculation (which has a value of around €3m for a total life). Moreover, it is interesting to notice that the social cost is in sharp increase. Mr Kopp cites better knowledge of addiction impacts, higher estimate of the value of one life but also the inclusion of the “loss of life quality” factor, which can count for up to ⅓ of the external cost estimate.
Both alcohol and tobacco have roughly the same social cost despite tobacco addiction being 4x more prevalent than alcohol. This is because alcohol has a larger impact on one’s life than tobacco. For instance, the life expectancy of alcoholics is shortened an average by 18 years (9 years for tobacco but still 18 years for drugs, including softer drugs like marijuana).
Interestingly, all 3 addictions are said to represent ⅓ of the current French budget deficit! Put this in perspective with most governments cutting sometimes vital entitlements to reduce their deficits while there is an obvious cost saving in front of their eyes.