CHAPTER 1

THE ECONOMICS OF ADDICTION

When discussing addictive behavior we need a clear definition of the termaddiction. It is not difficult to find definitions of addiction. The truly difficulttask is deciding which of the phenomenally similar, but not identical, definitionsto present. Here are two examples:

• a physiological and psychological compulsion for a habit-forming substance.In extreme cases, an addiction may become an overwhelmingobsession (http://www.personalinjuryfyi.com/glossary.html)

• a chronic, relapsing disease characterized by compulsive drug-seekingand use and by neurochemical and molecular changes in the brain(http:www.tobaccofreeqc.org/youth/glossary.php)

With words such as compulsion, obsession, and disease used to define it, addictionis certainly not considered to be a beneficial activity. Even healthy activitiessuch as exercising or eating well acquire the label exercise nut or health nutfor those who practice them excessively.

The American Psychiatric Association offers a more thorough definition:

Answer yes or no to the following seven questions. Most questions have morethan one part, because everyone behaves slightly differently in addiction. Youonly need to answer yes to one part for that question to count as a positiveresponse.

1. Tolerance. Has your use of drugs or alcohol increased over time?

2. Withdrawal. When you stop using, have you ever experienced physical oremotional withdrawal? Have you had any of the following symptoms: irritability,anxiety, shakes, sweats, nausea, or vomiting.

3. Difficulty controlling your use. Do you sometimes use more or for a longertime than you would like? Do you sometimes drink to get drunk? Doyou stop after a few drinks usually, or does one drink lead to more drinks?

4. Negative consequences. Have you continued to use even though therehave been negative consequences to your mood, self-esteem, health, job,or family?

5. Neglecting or postponing activities. Have you ever put off or reduced social,recreational, work, or household activities because of your use?

6. Spending significant time or emotional energy. Have you spent a significantamount of time obtaining, using, concealing, planning, or recoveringfrom your use? Have you spent a lot of time thinking about using?Have you ever concealed or minimized your use? Have you ever thoughtof schemes to avoid getting caught?

7. Desire to cut down. Have you sometimes thought about cutting down orcontrolling your use? Have you ever made unsuccessful attempts to cutdown or control your use?

If you answered yes to at least 3 of these questions, then you meet the medicaldefinition of addiction. (http://www.addictionsandrecovery.org/definition-of-addiction.htm)

Although less judgmental than the previous definitions, an underlying negativefeel is still associated with this more complete definition.

In contrast, the standard economic definition of addiction is judgmentfree. Here is an example taken from the seminal work on the economics ofrational addiction (Becker and Murphy, 1988):

The basic definition of addiction at the foundation of our analysis is that aperson is potentially addicted to a good if an increase in his current consumptionof the good increases his future consumption of the good. (681)

That may not be an elaborate definition, but it has some strong points in itsfavor. Unlike many of the other definitions of addiction, the economic definitiondescribes behavior, it does not condemn it. Quite simply, addictive behaviordepends on how consumption in one period affects consumption inanother period. If the more you smoke today, the more you want to smoketomorrow, smoking is addictive. But likewise, if the more you exercise today,the more you want to exercise tomorrow, exercising is addictive. With thisdefinition, you can consider the consumption of any good to be potentiallyaddictive. Furthermore, there is no reason to identify or distinguish betweenphysical addiction and psychological addiction. The only important trait toidentify is a person's consumption pattern over time.

Thinking about addiction as a consumption issue allows us to raise thetypes of questions in which an economist specializes. How do price changesaffect the consumption of addictive goods? What about income changes, informationchanges, or the costs of quitting? How do regulations or criminallaws affect consumption? More generally, we can challenge the premisethat addicts are somehow "trapped" by their addiction. As we do with otherconsumer products, we can predict that addicts make rational choices whenconsuming addictive goods. In other words, an addict will rationally chooseto trade off short-term benefits (getting high) with long-term costs (futurehealth problems). If addicts are making these trade-offs, we must address preciselyhow they compare future costs to current benefits. This comparison liesat the heart of the economic theory of addiction.

The Subjective Rate Of Time Preference

Consider the following thought experiment. You are asked to choose betweenthe following two options: receive $1,000 today or receive $1,000 exactly oneyear from today. Which option would you choose, keeping in mind that thereis no right or wrong answer? By far, the most common choice is the $1,000today, and let's assume that's your choice also. How would you answer a follow-upquestion: Would you prefer $1,000 today or $1,100 one year from today?Still the $1,000 today? How about $1,200 in one year? Not enough? How about$1,300, $1,400, or as much as $1,500? What would it take to get you to choosethe future amount? Eventually, we can find a future amount that you wouldchoose over the current amount of $1,000. What this experiment is tryingto demonstrate is that, dollar for dollar, we prefer current dollars over futureones. In fact, most of us must be paid a premium, perhaps a large premium,before we're willing to give up a current payment for a future one. More succinctly,most people tend to be impatient to some degree, while addicts areoften thought of as being highly impatient.

Economists have a simple tool for numerically measuring a person's levelof impatience—the discount factor (usually depicted by the symbol d, theGreek letter delta). Using the...