An Economic Analysis of Alcohol Prohibition

Abstract

The use of government prohibitions to address economic and social problems related to substance abuse is widespread, but this policy is surprisingly difficult to justify on economic grounds. Standard economic models suggest that prohibitions can have substantial undesirable consequences and that they may fail to accomplish their primary objective: reduced consumption of the prohibited commodity. Economic reasoning also suggests that moderate sin taxes on the commodity in question, possibly combined with various types of regulation, are likely to reduce consumption more effectively than prohibition while avoiding many of the negative consequences of prohibitions. Evidence from the U.S. experience with the prohibition of alcohol, 1920–33, is consistent with the predictions of the economic analysis of prohibition: neither alcohol consumption nor alcohol prices changed substantially, while violent crime increased.