In economic analyses of addictive behaviour, the consumption of a certain good is termed to be an addiction if an increase in past consumption of the good leads to an increase in current consumption. From policy, legal, and public health perspectives, addictive goods are of interest because the consumption of many of these goods harms the consumer and others. The US government and those of many other countries have chosen to regulate such addictive substances as cigarettes, alcohol, cocaine, and marijuana by means of policies that raise their prices. Consequently, the responsiveness of these substances to price is an important parameter in determining the optimal level of taxation or the impacts of legalization of cocaine or marijuana. The economics of addiction is very relevant to these issues because recent theoretical advances predict that addictive goods should be more sensitive to price than previously believed. Current empirical studies confirm this prediction. (A)
Abstract