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Olson S, Gerstein DR. Alcohol in America: Taking Action to Prevent Abuse. Washington (DC): National Academies Press (US); 1985.

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Alcohol in America: Taking Action to Prevent Abuse.

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4The Price and Availability of Alcohol

For over three decades the average price of alcoholic beverages in relation to that of other commodities has been going down. One of the main reasons for this decline is that federal and state taxes on alcohol have not kept up with inflation. Federal taxes on beer and wine have not changed since 1951, when they were set at 16 cents on a six-pack of beer and from 3 to 67 cents on a 750-milliliter bottle of wine. Federal taxes on distilled liquors did not change from 1951 until 1984, when they rose from $1.68 on a fifth of 80 proof liquor to $2.00. State taxes on alcoholic beverages have risen gradually during this period, but not at anywhere near the rate of inflation.

Thus, the "real" price of alcohol—its price relative to that of other goods and services—has dropped steadily (see Figure 4.1). Since 1967, inflation has cut the real price of distilled liquors nearly in half. The real prices of beer and wine have dropped by about a quarter and a fifth, respectively. Alcoholic beverages are now so inexpensive that their prices are within range of many nonalcoholic drinks. "Soft drinks and beer now sell at roughly the same price," says Dan Beauchamp of the University of North Carolina. "This was not true 15 years ago. The cost of nonalcoholic beverages has more than tripled in the same period that the cost of alcoholic beverages has less than doubled, and we now see price convergence of the two."

Figure 4.1. The average price of alcoholic beverages has not been going up as fast as the average price of all goods and services.

Figure 4.1

The average price of alcoholic beverages has not been going up as fast as the average price of all goods and services. As a result, alcoholic beverages have become relatively cheaper, which accounts for part of the rise in consumption over the past several (more...)

During the last three and a half decades, the per capita consumption of alcohol has been on the rise. It stayed roughly the same in the 1950s, spurted up in the 1960s, and rose slowly in the 1970s and 1980s. Since 1950, the per capita consumption of alcohol has risen over 30 percent.

One cannot assume that all of this increased consumption came about because alcoholic beverages were getting cheaper. Other factors, such as higher incomes, changing health habits, more tolerant attitudes toward drinking, and expanded marketing efforts may also have come into play. However, research to determine the weight of these competing factors relative to price changes was not widely conducted in this period.

Still, several lines of experimental and econometric evidence indicate that the price of alcohol has a substantial effect on how much people drink, which means that federal and state governments, by not keeping taxes up with inflation, have contributed to the increase in drinking in America since the 1950s. Similarly, it means that federal and state governments, by increasing their taxes on alcohol, have the capability to reduce the consumption of alcohol in this country. To decide whether they should do so requires a careful balancing of the costs of raising taxes against the costs of the alcohol-related problems that could be eliminated by reducing drinking.

Price is not the only attribute of alcohol sales that governments can control. There are a host of ways in which alcohol can become more or less available: New outlets or new kinds of outlets can open in neighborhoods or shopping centers; bars or liquor stores can keep longer hours; the minimum drinking age can go down or up. All of these changes can influence how easy it is to get alcohol and how much or where people drink. They are all potential instruments of public policies aimed at preventing alcohol problems.

Recent decades have seen a general relaxation of restrictions on the availability of alcohol. More outlets have opened, and they have been open more hours of the day. Drinking ages have gone down (although in some states they have more recently increased). The real price of alcohol has fallen. Given the toll that drinking exacts on society, many people have begun to ask whether it is possible to reenergize this gradually weakening regulatory apparatus to reduce the number of alcohol-related problems in America.

Government Regulation of Alcohol Sales

Throughout American history commerce in alcoholic beverages has been closely regulated and heavily taxed by federal and state governments. The first internal revenue law enacted by Congress under the Constitution was a liquor excise tax. Until Prohibition, taxes on alcohol were a major source of income for the federal government. In 1907 they constituted 80 percent of all federal internal tax revenues. Even at the beginning of World War II they accounted for 10 percent of these revenues. Today they figure very lightly in governmental budgets, averaging only about 1 percent of revenues at the federal, state, and local levels.

The repeal of Prohibition did not signal the end of governmental attempts to control alcohol. On the contrary, a host of federal, state, and local agencies oversee the commerce of alcohol from manufacture through final sale. At the federal level, the Bureau of Alcohol, Tobacco, and Firearms licenses manufacturers, wholesalers, and importers and regulates the advertising, size of containers, potency, and labeling of alcoholic beverages. It also collects around $5.5 billion each year from taxes on alcohol, with state and local governments taking another $6 billion (on total retail sales of over $60 billion).

Other federal agencies also have an influence on the price and availability of alcohol. The Department of Defense controls alcohol sales in clubs and post exchanges throughout the military. Eight million people are eligible to buy alcohol at these outlets, making this jurisdiction larger than that of many states. The Small Business Administration, since changing its rules in the late 1960s, has been lending money to the owners of taverns and liquor stores. And, as of this writing, the Internal Revenue Service's rulings on deductions for business-related meals and drinks countenance the three-martini lunch.

State and local governments have an even more prominent role in regulating the alcoholic beverage industry. They control almost every aspect of retail sale. All states set a minimum age for legal purchase, ranging from 18 to 21 years, and prescribe penalties for retailers who knowingly sell to underage customers. Most states restrict advertising, hours of sale, selling on credit, and so forth. The 21st Amendment left it to the states to decide if they wanted to remain dry. Many states have passed this option to local jurisdictions. In 1983 about 8 million of the United States' 226 million people lived in dry jurisdictions.

After Prohibition, 18 states created state or county liquor monopolies, to separate private profit from at least parts of the industry. The other states and the District of Columbia created licensing systems in which a regulatory agency oversees the distribution and sale of alcoholic beverages. Known as Alcoholic Beverage Control (ABC) boards in most states, these agencies decide which wholesalers and retailers will be permitted to operate in the state. They can also influence the density, location, and kind of retail outlets through their licensing activities. Finally, these boards license outlets such as restaurants that sell alcohol for on-site consumption.

The ABC boards were originally established to prevent the abuses of the pre-Prohibition era. They were intended to curb vicious or excessive drinking. But this purpose has gradually faded. A survey conducted in the mid-1970s by Medicine in the Public Interest found that the overwhelming majority of ABC administrators felt their responsibilities were not in any way related to public health.1 They instead stressed the importance of collecting tax revenues, maintaining orderly markets, and excluding crime from the business.

Yet it is clear that ABC laws also promote temperance and discourage inappropriate drinking, albeit less visibly. Minimum age laws, limits on the number and nature of outlets, and to some extent high taxes are all intended to limit the availability of alcohol and reduce the harm of inappropriate drinking. Recently, interest has been growing in again strengthening these mechanisms to lessen drinking problems. But the ghost of Prohibition continues to restrain such preventive efforts. It would be an important step forward to dissociate these efforts from the distorted image of Prohibition that now prevails.

Alcohol Prices, Highway Fatalities, and Cirrhosis Death Rates

A fundamental law of economics holds that as the price of something goes up, people will generally buy less of it. This undoubtedly explains part of the decline in drinking during Prohibition. The price of alcohol roughly tripled or quadrupled after the 18th Amendment took effect. Many people, especially those with lower incomes, could not afford to drink as much as they had before, even if they had access to alcohol.

The same effect, in reverse, may also account for part of the increase in per capita consumption that has occurred since the 1950s (see Figure 4-2). Over that period the real price of alcohol has dropped, largely because federal and state taxes have not kept up with inflation. At the same time, per capita consumption has gone up over 30 percent.

Figure 4.2. The per capita consumption of alcohol by adults in the United States has risen over 30 percent since 1950, with the greatest increase occurring during the 1960s.

Figure 4.2

The per capita consumption of alcohol by adults in the United States has risen over 30 percent since 1950, with the greatest increase occurring during the 1960s. A number of factors have contributed to this increased consumption, including lower relative (more...)

Of course, different people respond to changes in the price of alcohol in different ways. If a tax increase were to up the price of alcohol, one person might buy less, another might switch to a cheaper brand, another might drink just as much as before and pay the extra cost. This uncertain behavior is especially critical in the case of heavy drinkers, who account for a substantial portion of all alcohol consumed.

But even though it is difficult to predict how a particular person will behave, it is possible to draw conclusions about large groups of people. For instance, a tenfold increase during World War I in the price of aquavit in Denmark (the national beverage at that time) greatly reduced per capita consumption and the prevalence of heavy drinking. Also, the 26 percent rise in per capita consumption in the United States between 1961 and 1971 coincided with an increase in the death rate due to cirrhosis from 11.3 to 15.4 per 100,000 people. This rate would be an estimated 3 to 4 per 100,000 people if no alcohol were consumed.

Prohibition offers another example of how increases in price, reductions in consumption, and improvements in public health are linked. Statistics from this period uniformly indicate that drinking declined markedly as a result of Prohibition, especially among blue-collar workers. At the same time, deaths from cirrhosis and alcohol overdoses dropped to their lowest levels ever in the twentieth century. During the first years of Prohibition arrests for public drunkenness and admissions to mental hospitals for alcoholic psychoses (delirium tremens and dementias) plunged.

Some direct tests of the relations between the tax rates on alcohol, its consumption, and the effects of alcohol abuse have been performed by Philip Cook and his colleagues at Duke University. Cook examined the effects of 39 different increases in state liquor taxes between 1961 and 1975. These increases ranged from 4 cents to 28 cents on a fifth of 80 proof liquor (the federal tax during this time stayed constant at $1.68). He found not only a direct link between these price increases and consumption but also a connection between these price increases and two of the most serious consequences of alcohol use—cirrhosis of the liver and highway fatalities.

Whenever a state increased its liquor tax, Cook compared the change in that state's per capita consumption of alcohol with the changes in per capita consumption for all other states during that year. If the price of alcohol had an effect on consumption, the state in which the tax increased would be likely to have a relatively negative change in consumption. In 30 out of 39 cases, Cook found this to be true. "This is very strong evidence that an increase in tax reduces reported liquor sales in a state," he concluded.

Cook next applied this analysis to the death rates from cirrhosis for each of the states. Cirrhosis is a disease that generally develops after many years of heavy drinking. But because it is to some extent an interruptible disease, a decline in drinking could have an immediate effect on cirrhosis mortality. At any given time there is a reservoir of people who are within one year of dying from cirrhosis. If some of these people reduce their drinking because of a tax increase, the progress of their disease will slow and the rate of death from cirrhosis will go down.

Cook found that states with increased liquor taxes tended to have decreased cirrhosis mortality, a statistical result that could happen by chance just one time in fourteen. He concluded, "There is considerable statistical evidence that a liquor tax increase causes an immediate and substantial reduction in cirrhosis mortality." Cook also applied this analysis to the rate of highway fatalities in each state. Again, he found that mortality was linked to changes in the price of alcohol, an outcome that could result by chance just 4 percent of the time.

A more recent study by Cook and George Tauchen further quantified the link between tax increases and cirrhosis mortality.2 Based on 1981 prices, their study found that an increase in the federal liquor tax of 16 cents on a fifth of 80 proof spirits would reduce the nation's cirrhosis mortality rate by 1.9 percent. This effect "is far from trivial," Cook says. "According to this estimate, a doubling of the U.S. federal liquor tax would reduce the nation's cirrhosis mortality rate by a figure in the neighborhood of 20 percent."

Other researchers have found the magnitude of this potential reduction striking. "The effect estimated by Cook and Tauchen is extraordinarily large," says Jeffrey Harris of the Massachusetts Institute of Technology. "A 20 percent decline would mean a postponement of about 6,000 deaths annually." Harris cautions, however, that "several additional lines of research are needed to fill in the gaps in the taxation-cirrhosis story." Among these are the response of individuals to price increases in alcohol, the shifts in demand among liquor, wine, and beer as the price of each changes, and the prevalence trend of cirrhosis that is not related to drinking.

More recent studies have begun to fill some of these gaps, and support for the linkage between alcohol price increases and cirrhosis mortality is increasing, though some students of alcohol issues remain dubious about effects of the size Cook and Tauchen estimate. Balancing such doubts against the results of systematic analyses, the National Research Council panel on alcohol abuse found the evidence sufficiently strong to conclude: "Alcohol consumption and the problems caused by it respond to the price of alcoholic beverages, and we infer that the large reductions in the real cost of alcohol to consumers in recent years are likely to have exacerbated drinking problems . . . . Therefore we see good grounds for incorporating an interest in the prevention of alcohol problems into the setting of tax rates on alcohol."

Options for Increasing Alcohol Taxes

If the federal government decided to raise taxes on alcohol, it could do so in many different ways. One option would be to restore the federal tax in real terms to its 1951 level. This would raise the federal taxes on distilled liquors from $2.00 for a fifth of 80 proof liquor to about $5.00. Federal taxes on beer would rise to about 50 cents on a six-pack and to as much as $2.00 on a 750-milliliter bottle of fortified wine.

A less extreme but still substantial step would be for the federal government to double its taxes on alcohol, as it did for cigarettes in 1982. A six-pack of beer would cost 16 cents more, all other things being equal. A fifth of 80 proof liquor would cost nearly $2.00 more. Overall, if the tax increase were fully passed on to consumers, the price of liquor would go up by about 24 percent.

The amount of revenue this would generate for the government would depend on how people responded to the higher prices. If people bought just as much liquor as they do now and simply paid the higher prices, federal revenues would double, going from around $5.5 billion to $12 billion. If people drank less but spent just as much money as they do now, a greater portion of their expenditures would go for taxes and federal revenues would rise from $5.5 billion to $10 billion. Similarly, if the federal government returned its taxes to the 1951 level in real terms and people spent no more money on alcohol than they do now, federal revenues from alcohol taxes would rise to $15 billion.

These hypothetical tax increases are given only as examples, not as concrete proposals. As discussed later in this chapter, real tax increases would be much more complex, as would be the responses to those increases. One of these complications is that it may make sense to change taxes on different kinds of alcohol by different amounts. Under the current system distilled spirits are taxed much more heavily than beer and table wine. Per ounce of pure alcohol, liquor is taxed at 19 cents, beer at 6 cents, and table wine at about 1 cent. In part, this reflects the continued sway of the temperance idea that beer and wine are drinks of moderation and less harmful than distilled spirits.

Research has cast doubt on the validity of this preconception. Drunk drivers and alcoholics report drinking beer and wine as well as hard liquor. The major diseases associated with drinking depend only on the consumption of alcohol, not on the type of beverage in which it comes.

It may therefore be more appropriate to tax alcoholic beverages according to their alcohol content. For instance, if the federal taxes on beer and wine were made equal to the tax on liquor in these terms, a six-pack of beer would cost 35 cents more and an average size bottle of wine would cost about 50 cents more. Such a tax increase would raise more revenues for the federal government than would simply doubling the tax rates on all three beverage types.

Complexities of Increasing Alcohol Taxes

There are several adverse consequences of raising alcohol taxes, and these, too, must be considered in establishing policies. One frequently heard objection is that alcohol taxes are indiscriminate, that they affect the drinker who is unlikely to have any problems with alcohol as well as the drinker who is. As noted in Chapter 2, however, it is often difficult to make this distinction. Also, higher taxes on alcohol may have benefits that apply to everyone in society. If they succeed in reducing the number of problems associated with alcohol, everyone would profit from safer highways, lower automobile and health insurance premiums, and fewer problems among friends and acquaintances.

Another question about higher alcohol taxes is whether they would overburden America's heaviest drinkers. Because just 5 percent of all adults drink 50 percent of the alcohol consumed in the United States, this small part of the population would pay about half of the increased taxes on alcohol. If some portion of these people are physiologically addicted to alcohol, might they drink just as much and pay the extra cost, making their lives more difficult without affecting their dependence on alcohol?

The work of Philip Cook and other researchers points in a different direction. Because people who contract cirrhosis are generally very heavy drinkers, cirrhosis death rates are a commonly used proxy measure of alcoholism. Thus a drop in cirrhosis death rates with an increase in the price of alcohol, which is the correlation Cook demonstrated, is evidence that very heavy drinkers are changing their consumption in response to price. Other researchers have used related measures to show that the drinking habits of alcoholics and other problem drinkers are not immune to the laws of supply and demand.

Another point that should be made is that people who drink excessively suffer proportionately more of the physical, social, economic, and emotional problems associated with drinking. In this sense, an increased tax on alcohol is more selective than it might appear. If excessive drinkers reduce their consumption in response to a higher tax, they could suffer fewer health problems and be more successful at their jobs. Thus their financial situation could improve because of a tax increase, although as usual this would vary from person to person.

Excessive drinkers also tend to use more of the public services provided for alcohol-related problems. These drinkers place expensive demands on medical care, alcoholism treatment, minimum income maintenance, and other social services. Tax receipts from alcohol sales already cover some of the public outlays for the portions of these services that go for alcohol problems. But, as we will see in the last section of this chapter, policymakers may wish to make this link explicit by requiring that increased taxes help pay for more extensive services.

One last question to be considered is how much more heavily higher alcohol taxes fall on poor families than on wealthier ones. In principle, excise taxes on alcohol are regressive in that they equal a lower percentage of a household's income as that income goes up. However, they are not as regressive in practice. Surveys show that purchases of alcohol increase as incomes rise, implying that wealthier people would also pay more of a tax increase. The consumption of alcohol "markedly increases with income," says Jeffrey Harris. "As in the case of tobacco, the reduced consumption at very low-incomes reflects to some degree a large number of older, low-income abstainers." Even when age is taken into account, however, alcohol use increases with income.

Limits on the Availability of Alcohol

The price of alcohol is only one of many factors that influence how much, where, and when people drink. Other important factors are those that influence how easy it is to get alcohol. Over the last three decades legal restrictions on the availability of alcohol have generally eased. Minimum drinking ages have gone down (though recently they have been going back up), alcohol has been sold at more kinds of places, and these places have kept longer hours. It seems clear that if alcoholic beverages are sold in more restaurants, cafeterias, sports arenas, theaters, and other places, consumption will rise.

Federal, state, and local governments regulate these sales in various ways. They set minimum drinking ages. They control the number, location, and kinds of retail outlets. And they control the operation of these outlets by specifying legal hours of sale, setting minimum or maximum purchases per customer, requiring that food be served with drinks, prohibiting sales to drunk customers, requiring that operators maintain orderly premises, and so on.

Using this apparatus of regulation to prevent alcohol-related problems need not entail a return to the severe restrictions of the past. Less drastic changes can also influence the amount or the setting in which people drink. For instance, asks Robert Reynolds of San Diego County's Department of Health Services, "Is there any real reason to continue the sale of beer and wine in a stadium after the seventh inning, when people are about to drive out? Or in recreation sites? . . . These are areas of availability that do not specifically have to do with licensing regulations, but with local values and mores."

Regulations on availability can also be used in more traditional ways, especially to counter specific local problems. "There are many strategies that are the prerogatives of local governments, such as zoning, that can be used in heavily impacted areas," says Reynolds. "Why should a community not choose to refuse more outlets if, for example, its alcohol-related crime rate is already 20 percent above the norm? Communities can mobilize around those kinds of issues and have an impact on the number of outlets permitted."

The results of broad changes in the availability of alcohol are sometimes difficult to predict. For guidance, researchers have often looked to the experience of other countries, such as Finland in the 1960s and 1970s. There a long period of liberalization during the 1960s culminated in the passage of the Alcohol Act of 1969. This act abolished restrictions that had banned alcohol sales in rural areas, lowered the drinking age for certain beverages, and permitted retail shops to sell beer with a higher alcohol content.

According to Dan Beauchamp, who has studied this episode intensively, "The effects of these changes took virtually everyone by surprise." During the first year after the act, per capita consumption rose 46 percent. By 1975 the Finns were drinking 156 percent more beer, 96 percent more spirits, and 87 percent more wine. Total per capita consumption was more than twice what it had been just seven years before.

Outlets selling alcohol have multiplied in recent years, making alcohol available at a much wider range of places and times


Outlets selling alcohol have multiplied in recent years, making alcohol available at a much wider range of places and times.

The Alcohol Act of 1969 was not the only catalyst for increased drinking during those years. Consumer expenditures per capita were also increasing, and general cultural attitudes were becoming more liberal, especially among young people. But the act contributed to the creation of a dense distribution network in Finland that had the effect of increasing consumption.

Does this experience have any relevance for the United States, where a dense distribution network for the most part already exists? Research on variations in the number or location of outlets in various parts of the United States has been inconclusive, and there are specific situations about which little is known. For instance, do sales of alcoholic beverages in groceries or drugstores increase the amount consumed? Do minimarts attached to gas stations lead to more drunk driving?

Overall, concludes Michael Goodstadt of the Alcoholism and Drug Addiction Research Foundation in Toronto, the issue of availability is much like that of violence on television. The data suggesting a link between greater availability and more drinking are not conclusive. But they are strong enough for policymakers to view with caution any action that would make alcohol more available. "Quite a number of studies, in addition to common sense, would suggest that we stop making alcohol ever more available," says Goodstadt. "The data are not sterling, you would not stake your entire reputation on any single study, but collectively you would say: 'Hold on.'

Political Realities

Legislators must take into account many competing concerns besides public health in making decisions about alcohol policy. For instance, when Congress raised the federal tax on cigarettes from 8 cents to 16 cents per pack in 1982 (it too had not been changed since the 1950s), the incidence of lung cancer may not have been as forceful an argument as the need to help reduce a skyrocketing federal deficit. Still, if people smoke less as a result of the price hike, one effect of the tax increase will be an improvement in health.

Increasing the taxes on alcohol could have this same dual effect. "Taxation has the clear advantage of working at a distance from people and accomplishing more than one end, which in politics is always good," says Dan Beauchamp. Whatever a legislator's motivation, higher taxes on alcohol could both reduce alcohol problems and raise public revenues. "There are a number of alternatives for reducing the U.S. budget deficit," says Cook. "Few of them have the substantial beneficial side effects that would result from raising the alcohol excise tax rates."

Then again, there are a number of powerful factors working against an increase in alcohol taxes. For instance, higher taxes at the federal or state level may affect the net receipts of the alcoholic beverage industry and impinge on the profit margins or business practices of brewers, vintners, distillers, and the thousands of restaurants, taverns, liquor stores, and other outlets that sell alcohol. These effects will be closely scrutinized, for, as John Vassallo of New Jersey's Division of Alcoholic Beverage Control points out, "Alcoholic beverage taxes or profits (in the control states) are very important to the economy of almost every state."

People who suspect they would be adversely affected by a tax increase can be expected to make their voices heard in a legislature. The alcoholic beverage industry has traditionally been a powerful constituency, and their influence on alcohol policy can be strong. Michael Fox of the Ohio General Assembly has experienced this kind of pressure firsthand:

A lot of folks make a good living selling alcoholic beverages, and they have for years contended that tax policy affects consumption. I spent four years on the state government committee in Ohio, and all we heard in that committee were what we affectionately called "booze bills." One after another, the tavern owners and the wholesalers would come before us and say, "You are putting us out of business, this is affecting our sales. . . ."

I mention this as a word of caution. There is a real world out there in which legislators get beat over the head. If a bill goes to a state government committee or a similar committee in one of the legislatures, it will have a hard time getting out of committee because such committees are dominated by people who are generally friendly to the industry.

One way that legislators have made tax increases more acceptable to the public is by earmarking portions of the revenues obtained for use in specific alcohol treatment or prevention programs. Small taxes on alcohol can generate relatively large revenues for alcohol programs, and several states have already taken steps in this direction. New York State requires that half of the money collected from drunk driving fines be returned to the county where the arrest was made for education and prevention programs. Other states require drunk drivers to pay for their own treatment programs. Such links between cause and effect can be politically essential. "It has become very clear," says Alfred McAlister of the University of Texas, "that the political acceptability of such a tax increase depends on whether the public perceives some connection, an earmarking or diversion of a portion of the funds, to prevention programs."

But the earmarking of funds also has its difficulties. According to Jane Smith Patterson, Secretary of Administration for the State of North Carolina, state legislatures have traditionally resisted such proposals. "At the state level, legislatures and governors across the country flatly dislike the earmarking of public revenues and will fight you even though they agree with what you want to do. They do not want funds to be dedicated in the actual excise tax act. They want the funds raised first."

If revenues are not earmarked, there is always the possibility that other demands—possibly even other health care needs—will siphon them off from programs to prevent alcohol problems. To this problem Patterson answers, "You will just have to sell your state legislature on prevention."



Medicine in the Public Interest. The Effects of Alcoholic-Beverage-Control Laws Washington, D.C.: Medicine in the Public Interest, Inc., 1979.


P. J. Cook and G. Tauchen. The effect of liquor taxes on heavy drinking. Bell Journal of Economics 13 (1982):379–390.

Copyright © 1985 by the National Academy of Sciences.
Bookshelf ID: NBK217454


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