The individual private cost of problematic alcohol use: a compensating income variation approach

While the social cost of problematic alcohol use has been examined, limited information exists on the private cost incurred by consumers. Using Icelandic panel data and the compensating income variation (CIV) method we estimate this individual private cost. We examine results using different measures of problematic alcohol use, two non-linear functional forms for income, and two utility proxies. We estimate the yearly individual cost, or CIV, to be 4-62 thousand USD. These estimates are considerably higher if not adjusted for income endogeneity. Results suggest that the CIV method is highly sensitive to model specifications in two areas: (i) The modelling of income; log-transformation contrasted with a piecewise-linear form shows that high-income groups affect full sample CIVs substantially, highlighting differences between mean and median value-estimates. This raises ethical questions on the trade-off between utilitarian policies based on means and largely driven by high-income groups, versus policies guided by median values that benefit most individuals. (ii) The choice of utility proxy; the CIV using happiness is substantially higher than that obtained using life satisfaction. This highlights the need for policy makers to consider whether their objectives should focus on cognitive measures of subjective well-being or affective measures.