Economic Man and the Consumption of Addictive Goods: The Case of Two Goods

Abstract

It is well known that cigarette smoking and the use of other addictive goods is harmful to health. Still, some people smoke cigarettes and drink alcohol in their daily lives. The consumption of addictive goods seems, therefore, to be the antithesis of rational behavior. In this article, however, it is demonstrated that a rational individual, in the sense that he or she maximizes his or her well-being while anticipating the future consequences of his or her choices, may in fact choose to consume addictive goods. Specifically, the two-good extension of the rational addiction model is demonstrated and related to relevant policy questions. For instance, should one encourage the use of smokeless tobacco in smoking cessation programs? According to the empirical results, the answer is no. Further, should one discourage smoking by increasing the tax on cigarettes? Again, the answer is no.

Keywords:

• alcohol
• bootlegging
• cigarette smoking
• complements
• craving
• demand
• elasticity
• habit stock
• myopic behavior
• rational addiction
• relapse
• satisfaction
• substitutes
• tolerance
• utility

Notes

¹A caveat is necessary for the reader. The model presented in this article does not claim to explain the reason(s) why or the process of becoming an “addict.” The model explores that when a person is “addicted” to the substance, whether economic theory may contribute to our understanding of the demand for such substances. Further, this model is not pharmacologically based but rather tries to put the demand for these substances into an economics context. We are fully aware of the ongoing process of mystifying and empowering drugs and their actions and not distinguishing between pharmacological effects and the “drug experience.” The reader is reminded that substance use of any type or pattern and abstinence are best considered as being nonlinear, complex, dynamic, multidimensional, phase/level structured, and bounded (culture, time, place, etc.) phenomena. They are not simplistic, linear, cause and effect outcomes.

²Of course, a more realistic way to model the instantaneous utility is to assume that present utility is influenced by the amount of smoking that has taken place in all previous periods. The key results, however, are not affected by our simplification.

³Note that the assumption of perfect capital markets, in combination with perfect foresight (as we have in our model), implies that the representative consumer can borrow and lend money freely, i.e., consume future (known) income today and save current income for the future. Therefore, we do not include income in our model but instead the present value of wealth. The exclusion of income is further motivated by the fact that the instantaneous utility function in the neighborhood of steady state is approximated by a quadratic function in the arguments, which implies that the first-order conditions are linear and, thus, that the income distribution will not affect the solution to the maximization problem. This also motivates the use of a representative consumer for the aggregate cigarette market.

⁴A recent Swedish survey found that 15% of men (only) smoke daily 18% (only) take snus, and 2% are mixed users. For women, the corresponding figures are 22% smokers, 1% snus takers, and practically no mixed users (Melkersson, 2002).

⁵Note that the level of U_cH is assumed to be independent of past smoking. The reason is that the habit stock for snus, H[t], does not depend on cigarette smoking.

⁶See Bask and Melkersson (2003) for a derivation of the demand equations and a derivation of the parameter signs.

⁷See Bask and Melkersson (2003) for a derivation of the long-run demand elasticities.

⁸The model above is modified to specifically consider legal and bootleg cigarettes. For more technical details, see Andersson et al. (2003). Note that whereas the authors do not have access to information on the price of illegal cigarettes, this price is replaced by the price of legal cigarettes.

⁹This result may be compared with Andersson et al. (2003), who found that the demand for bootleg cigarettes is well described by the rational addiction model.

¹⁰Kandel and Maloff (1983) and Ellickson and Hays (1991) also find complementarity between alcohol and marijuana.