“cost of illness” method of accounting. That method stipulates that the social cost of a harmful activity or illness is the sum of direct costs (property damage, medical costs, and so forth) and indirect costs (lost productivity). Lost productivity has little relationship to the value that individuals and those who care about them place on the value of health and continued life.
A comprehensive accounting framework, then, should take account of both tangible and intangible costs associated with the consequences of underage drinking. The PIRE analysis cited above does just that. Of the $53 billion in costs estimated for 1996, all but $4 billion is the result of lost quality and quantity of life.3
While this report is not the place to explain the methods used to arrive at this result, we note that it is based on the underlying principle that (adult) preferences should guide the valuation. Those preferences are observed in a generic sense in a variety of settings and choices, where people make risky decisions. For example, wages for risky jobs tend to be higher than safe jobs requiring comparable skill and effort: the “risk premium” reflects the amount that workers must be compensated to take on additional risk, and thereby form a useful basis for assessing the average “value of life.” Note that what is being valued is not literally life itself, but rather a slight reduction in the probability of continued life. This valuation of small changes in safety is relevant for a forward-looking assessment. In assessing a proposed policy to reduce underage drinking, one does not know the identity of which lives will be saved; rather, the prospective accomplishment is a general reduction in risk for all, and that is what is to be valued.
The PIRE study is somewhat incomplete. For example, the study’s estimate does not include medical costs other than those associated with traffic crashes (Hingson and Kenkel, 2004). Perhaps most important is that it neglects the possibility that drinking by teens may cause mild brain damage and lead to impaired academic performance and early termination of schooling. It also takes no account of the possibility that underage drinking engenders a greater likelihood of subsequent problems with alcohol dependence and abuse. In these respects the $53 billion appears to be an underestimate of the social costs of underage drinking.
In sum, the cost of underage drinking to society is substantial. Society is affected by loss of young lives, lost productivity and significant health care costs and stands to gain from reductions in underage drinking. The committee concludes that the PIRE estimate of $53 billion, while perhaps somewhat low, is a reasonable starting point for assessing social costs.
The study reports separately the value of lost productivity ($11 billion) and of additional losses in quality and quantity of life ($38.5 billion). The reason for making this distinction is apparently a belief that some of the audience for the report expect to see the productivity measure as a separate statistic.