Understanding the Demand for Alcohol in the United States Open Access

Abstract

This dissertation consists of three chapters which are dedicated in understanding the demand for alcohol in the United States. Chapter 1 investigates whether heavy drinkers among young adults are more responsive to higher alcohol prices compared to light or moderate drinkers. I find that the price elasticity of demand is highest among heavy drinkers. Chapter 2 studies the relationship between cigarettes and alcohol by investigating the effect of higher cigarette prices on alcohol consumption among young adults, exploiting sizeable variation in cigarette prices after the Master Settlement Agreement. I find that young adults increase their alcohol consumption in response to higher cigarette prices suggesting that cigarettes and alcohol are substitutes. The pattern of substitution is prevalent across the light, moderate, and heavy drinkers; however, substitution is more concentrated towards heavy drinkers. Chapter 3 improves the understanding of the optimal level of alcohol taxation in the United States by considering the external cost associated with heavy drinking. I conclude that the optimal tax rate is 14 percent of price per drink. Even the conservative estimates suggest that heavy drinkers do not pay their way out.

Table of Contents

Preface...1

Chapter 1: Estimating the Price Elasticity of Demand for Different Levels of Alcohol Consumption Among Young Adults

1. Introduction...9

2. Data...13

2A. National Longitudinal Survey of Youths 1997...13

2B. Alcohol Prices...14

2C. Variables Reflecting Drinking Sentiments...16

2D. Other State Variables...19

3. Methods...21

3A. Two-Part Model with Pooled Quantile Regression...21

3B. Quantile Regression for Panel Data...23

3C. Finite Mixture Model...25

4. Results...28

4A. Results from Pooled Quantile Regression...28

4B. Penalized Quantile Regression Results...29

4C. Finite Mixture Results...31

5. Robustness Check...32

5A. Measurement Error...32

5B. Zero Tolerance Law...34

5C. State Specific Linear Time Trends...34

5D. Excluding Potentially Endogenous Variables...35

6. Comparison to Earlier Findings...35

7. Conclusion...37

References...40

Chapter 2: Do Young Adults Substitute Alcohol for Cigarettes? Learningfrom the Master Settlement Agreement

1. Introduction...61

2. Conceptual Framework...65

2A. Mechanisms...67

2B. Can Higher Cigarette Prices Affect Alcohol Consumption through Psychological Channels?...70

2C. Alcohol Demand Function, Cigarette Prices, and the Reduced Form...71

3. Data...71

3A. Behavioral Risk Factor Surveillance System (BRFSS)...72

3B. Cigarette Prices and Smoke-Free Air Laws...73

3C. Alcohol Prices and Policies...75

4. Identification Strategy and Empirical Methods...76

4A. Quantile Regression...79

4B. Regression Discontinuity Design (RDD)...79

4C. Finite Mixture Model (FMM)...82

5. Results...84

5A. Did Higher Cigarette Prices Change the Relationship between Cigarettes and Alcohol? Results from the Two-Part Model...85

5B. Did MSA Increase Alcohol Consumption? Results from RDD...89

5C. Who Responded to Higher Cigarette Prices?--Finite Mixture Model Results...92

5C.1. The Effect of Cigarette Prices on Alcohol Demand...92

5C.2. Prior Probabilities...93

5C.3. Posterior Probability...93

6. Cigarette Prices and Driving Fatalities...94

7. Anti-smoking Sentiments and Alcohol Consumption (Direct Versus Indirect Channel)...97

8. Evidence Regarding Potential Threats to Validity...98

8A. Smoke-Free Air Laws...98

8B. Smoking Restrictions...99

8C. Smoked Versus Never Smoked...99

8D. Measurement Error...100

8E. Reverse Causality...102

8F. Border Effect...102

9. Conclusion...103

References...105

Appendix...128

Chapter 3: How Efficient are the Current U.S. Alcohol Taxes?

1. Introduction...139

2. Framework and Assumptions...141

3. Estimating the Price Elasticity of Demand for Moderate and Heavy Drinkers...143

3A. Data...143

3A.1. Behavioral Risk Factor Surveillance System (BRFSS)...143

3A.2. Alcohol Taxes...144

3B. Identification Strategy...145

3C. Results...146

4. The External Cost of Heavy Drinking...147

4A. Effect of Heavy Drinking on Mortality (Excluding Drunk-Driving)...148

4A.1. Method and Data...149

4A.2. Results...151

4B. Medical Expenses...152

4B.1. Data...152

4B.2. Method and Results...154

4C. Alcohol-Related Drunk Driving Fatalities...156

4C.1. Data and Results...156

4D. Effect on Social Security...158

4E. Taxes on Earnings and Productivity...159

5. Summing up...160

6. Conclusion...161

References...163

About this Dissertation

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School	Laney Graduate School
Department	Economics
Degree	PhD
Submission	Dissertation
Language	English
Research Field	Economics, General
Keyword	Externality Alcohol Prices Alcohol Demand Cigarette Prices
Committee Chair / Thesis Advisor	Markowitz, Sara, Emory University
Committee Members	Mialon, Hugo M, Emory University Francis-Tan, Andrew, Emory University

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