Economics of Drug Addiction
Economics of Leisure Recreation, and Sports
Econ 291:20
Roberto Martinez-Espiñeira
Winter 2007
1
Introduction
• Alfred Marshall (1890) touched upon
addictive behavior in his famous book,
Principles of Economics:
– “ Whether a commodity conforms to the law
of diminishing or increasing return, the
increase in consumption arising from a fall
in price is gradual: and, further, habits which
have once grown up around the use of a
commodity while its price are low are not so
quickly abandoned when its price rises
again”
2
Introduction
Phlips (1983) notes that with this
statement, Marshall captures the three
fundamental aspects of addiction:
• physical response (tolerance)
• irreversibility (withdrawal),
• and positive effects of habits
(reinforcement)
3
Introduction
• Most economists since Marshall have tended
to view an addict as a myopic, imperfectly
rational individual whose behavior is not
conducive to standard economic analysis
• Thomas Schelling (1978) in describing a
smoker who wishes to ‘kick the habit’
– “Everybody behaves like two people, one who
wants clean lungs and long life and another who
adores tobacco…The two are in a continual contest
for control; the ‘straight’ one often in command
most of the time, but the wayward one needing
only to get occasional control to spoil the other’s
best laid plan”
4
Introduction
• Purpose of this lecture is to show how
the tools of economics can be used to
understand drug addiction
• We begin with a brief overview of the
nature and extent of global illicit drug
use
• Next, we examine how economists
define addiction versus those from other
disciplines
5
Using Illicit Drug Statistics
• Throughout this course, it will be shown that
economists have difficulty in obtaining reliable
and consistent data relating to the various
topics covered
• Illicit drugs are no exception
– By definition, it is a largely ‘hidden’ activity, and
aside from the difficulty of observing the market
price of an activity that does not enter the official
market, the figures economists work with in this
area tend to be drawn from either drug users’ selfcompletion surveys or are derived indirectly from
other data
6
Global Illicit Drug Use
• The official source of data for global
illicit drug use is the United Nations
Drug Control Program (UNDCP)
– The table in Slide #7 shows that over the
2003-04 period, the total number of illicit
drug users was estimated to be 200 million,
equivalent to 3.2% of the global population,
or 5% of the population aged 15 and above
– The table also shows that cannabis
(marijuana) is the most commonly used
substance, followed by amphetamine-type
substances
7
Global Illicit Drug Use – 2003-04
Illicit
drugs of
which:
Cannabis
Amphetamines
Ecstasy
Cocaine
Opiates
Of
which
heroin:
Global
(million
people)
200
160.9
26.2
7.9
13.7
15.9
10.6
In % of
global
population
3.2%
2.5%
0.4%
0.1%
0.2%
0.3%
0.2%
In % of
global
population
age 15 and
above
5.0%
4.0%
0.6%
0.2%
0.3%
0.4%
0.2%
8
Global Illicit Drug Use
• The figures on Slides #9 and 10 show
some cross-country comparisons
– Have a think about how you would
explain the differences in reported drug
use as well as ‘lifetime experience’ versus
‘recent use’
0
United States (2003)
Spain (2001)
Portugal (2001)
Norway (1999)
Netherlands (2000/01)
Italy (2001)
Germany (2000)
France (2000)
Finland (2002)
England & Wales
(2002/03)
Denmark (2000)
Australia (2001)
% reporting use
9
Lifetime Prevalence of Illicit Drug Use in
USA, Australia, and Europe
45
40
35
30
25
20
Marijuana
Cocaine
Amphetamines
Ecstasy
15
10
5
0.0
United States (2003)
Spain (2001)
Portugal (2001)
Norway (1999)
Netherlands (2000/01)
Italy (2001)
Germany (2000)
France (2000)
Finland (2002)
England & Wales
(2002/03)
Denmark (2000)
Australia (2001)
% reporting use
10
Last Year Prevalence of Illicit Drug Use
in USA, Australia, and Europe
14.0
12.0
10.0
8.0
6.0
Marijuana
Cocaine
Amphetamines
Ecstasy
4.0
2.0
11
Theories of Addiction
• Theories of addiction help explain how
an individual may cross the threshold
from casual drug use to consumption
which may be deemed addictive
• Non-economists define addiction as a
behavior over which an individual has
impaired control with harmful
consequences
• West (2001) classifies theories of
addiction into five categories
12
Theories of Addiction
• (1) The first group “attempt to provide
broad insights into the conceptualization
of addiction”
– explaining addiction in terms of biological,
social, or psychological factors
– E.g. Betz et al. (2000) examines whether a
common biochemical mechanism may
underlie addictions
13
Theories of Addiction
• (2) The second group tries to “explain
why particular stimuli have a propensity
to becoming a focus for addiction”
– The positive and reinforcing properties of
addictive drugs have been widely
investigated
• Robinson and Berridge (1993) suggest that these
properties are enhanced rather than lessened by
repeated exposure
14
Theories of Addiction
• (3) The third group examines, ‘why
particular individuals are more
susceptible to addiction than others’
– Some persons may be particularly
responsive to a specific stimulus, whether
biochemical, psychological, or social
– Cheng et al. (2000) and Cunningham et al.
(1992) investigate whether this
susceptibility may be genetic
15
Theories of Addiction
• (4) the fourth group addresses “the
environmental and social conditions
which make addiction more or less
likely”
– An individual may find himself in a
particular situation which triggers the need
for the effects of a stimulus, or in which
those effects take on a greater significance
– Kenkel et al. (2001) examine the role of economic factors in
the initiation and progression of drug use in this context
16
Theories of Addiction
• (5) The fifth group “focuses on recovery and
relapse…some are broad perspectives, other
focus on effects of withdrawal from particular
stimuli such as drugs; still others focus on
individual factors and others seek to model
environmental influences”
– An important contribution in this field is Prochaska
and DiClemente’s (1983) Transtheoretical Model
which identifies stages of change and other factors
that predict treatment outcomes
17
Theories of Addiction
• Economists focus on a good being
addictive if an increase in the stock of
past consumption results in an increase
in current consumption, ceteris paribus
• In particular, an economist is interested
in rationalizing the observed behavior of
an addicted individual
– Rationalizing means to seek an explanation
which identifies the individual’s objectives,
preferences, and constraints so that a rule
can be derived to predict the behavior
19
Theories of Addiction
• Our focus is to rationalize harmful addiction
(increasing consumption of a good or activity
which has, for example, detrimental future
effects upon one’s health)
• Of course, theories of addiction can explain
also beneficial addiction (e.g.. reading of one’s
favorite novel over and over again could be
perceived as a beneficial addiction if a deeper
understanding of the story results in even
greater appreciation of its quality)
20
Theories of Addiction
• All behavioral theories of addiction
assume that the amount of addictive
good consumed in the past has lasting
effects of some sort
– Higher past consumption may result in a
modification of the consumer’s
preferences, that is, the extent to which he
or she ‘likes’ to consume the addictive
good
21
Theories of Addiction
• Someone ingests more heroin now
since past consumption of the drug has
increased his tolerance for the drug
• requiring larger amounts of the drug to
derive the same degree of satisfaction
as experienced in the past
22
Relative theory of addiction
• Stigler and Becker (1977) were among the
first economists to rationalize the behavior of
increasing consumption of a good or activity
• Their relative theory of addiction stands in
the economic tradition of the common
preference approach, that is, they attempt to
explain differences in behavior across
individuals by differences in economic
constraints, as opposed to the individual’s
objectives or preferences
23
Relative theory of addiction
• Rather than assuming a relationship
between previous amounts of
consumption of a drug and preferences to
explain addiction, Stigler and Becker
present a theory which posits a feedback
between consumption and its effective
price as perceived by the individual
24
Relative theory of addiction
• Assume individuals have a preference for the
commodity, ‘euphoria’, that is home-produced
(i.e. not purchased in a market)
• However, the effective price of one unit of
euphoria can be derived from information on
the cost of the inputs used in the production of
euphoria and on the technology used to
produce euphoria
– E.g. price of heroin and risk of getting caught using
heroin
25
Relative theory of addiction
• The production of euphoria also depends
on individual-specific ability to
experience the sensation
– Known as euphoric capital or, more
generally, consumption capital
• Stigler and Becker introduce a feedback
between past euphoria and the euphoric
capital stock at present
– i.e. the euphoric capital depends on previous
amounts of euphoria experienced
26
Relative theory of addiction
• The theory predicts that under certain
conditions, the demand for inputs in the
production process increases while the
euphoric capital and amount of euphoria
decreases
• Therefore, the model can explain an
individual’s path of rising heroin demand while
the consumption of euphoria is falling and the
price of heroin remains constant
• The condition necessary for this to occur is a
sufficiently inelastic demand for euphoria
27 Melioration Theory of
Addiction (‘Primrose Path’)
• Herrnstein and Prelec (1992) explain
why individuals may deliberately
choose a path of increasing consumption
of a harmful good or activity
27 Melioration Theory of
Addiction (‘Primrose Path’)
• In the figure Point A shows the instantaneous
payoff to an alternative activity (‘going out
with friends’) if the individual has never
experimented with heroin
• Point B shows the payoff to using heroin if
this is the individual’s first experience of the
drug
• Given the higher payoff associated with Point
B, it is rational for the individual to choose to
use heroin for the first time and experiment
with mixing the frequency of the drug use and
the alternative activity
28 Melioration Theory of Addiction (‘Primrose Path’)
Instantaneous
payoff
payoff to drug given history of drug use
B
payoff to alternative activity given history of
C
drug use
weighted average payoff to all actions
A
D
State dependence (proportion of times using
drug or engaging in alternative activity)
29 Melioration Theory of
Addiction (‘Primrose Path’)
• Melioration theory considers that the payoffs
over time to these actions are path-dependent
(they depend upon the history of drug use)
• The light solid line represents the payoff to the
alternative activity (going out with friends)
given the individual’s recent history of drug
use
• The dashed line represents the payoff to using
heroin
• The dark solid line shows the weighted average
payoff to all actions undertaken by the
individual through time
30 Melioration Theory of
Addiction (‘Primrose Path’)
• Point C on the solid line represents the highest
possible average payoff for the individual
(where the MB of heroin use equals MC)
• Melioration theory argues that point D is the
equilibrium solution because beyond point C,
the instantaneous payoff to heroin use is still
greater than the payoff to the alternative
activity
• The individual has an incentive to increase his
heroin use until the payoffs from both
activities are equalized (point D)
31
Melioration Theory of
Addiction (‘Primrose Path’)
• At D, the individual is worse off than had he
not started using heroin
• The average payoff from both activities at D
is lower than the associated payoff associated
with A
• The individual has ventured down a ‘primrose
path’ of addiction, initially believing there
was little danger of losing control but
eventually becoming ‘trapped’
• Each individual decision made by the
individual along this path was rational, the
sequence of decisions was certainly not
rational
32
Theory of Rational Addiction
• The melioration theory of addiction is
criticized for assuming that an individual
is unable to anticipate future
consequences of his activities
• How increasing consumption of a harmful
good is possible among individuals who
are fully aware of their current choice is
addressed by Becker and Murphy (1988)
in their theory of rational addiction
33
Theory of Rational Addiction
• The rational addiction theory is the most
influential economic theory of addiction
to date
• It builds on the relative theory of
addiction, but assumes that instead of
consuming heroin-induced euphoria, the
individual derives utility from consuming
the heroin itself
• NB: We present here a more basic
version of the theory than the one
presented in the book
34
Theory of Rational Addiction
• This theory formally derives aspects of
dynamic consumption behavior with
respect to an addictive good
• An individual takes into account the
consequences of their decisions on future
outcomes and is seen as more rational
than previous models that assume
myopic (short-sighted) behavior
35
Theory of Rational Addiction
Here is an equation that can help spell out
the important aspects of the theory:
Ct = αCt-1 + βαCt+1 + δPt
• Ct = consumption of drug at time t (today)
• Ct-1 = consumption of drug at time t-1
(yesterday or last week)
• Ct+1 = consumption of drug at time t+1
(tomorrow or next week)
• Pt = price of drug at time t (today)
• Ct = αCt-1 + βαCt+1 + δPt
• α measures the effect of an increase in past
consumption (Ct-1) on marginal benefit of
current consumption (Ct) and effect of increase
in future consumption (Ct+1) on marginal
benefit of current consumption (Ct)
• α is assumed to be positive (i.e. current
consumption is positively related to past and
future consumption)
• Ct = αCt-1 + βαCt+1 + δPt
• β is a time-discount factor (measures rate of preference for the
present)
• Assume β is smaller than 1. Individuals prefer to consume 100
units of drug today than wait until tomorrow to consume same
amount
• The more heavily the future is discounted (the smaller is β), the
more likely that a consumption path is followed that leads to
addiction
– for a myopic individual (someone who completely discounts the
future) β = 0
•
δ measures extent to which changes in price of drug affect
consumption of drug and is assumed to be negative
38 Theory of Rational Addiction
• Ct = αCt-1 + βαCt+1 + δPt
• Past consumption reinforces current consumption
here, so the short-run price elasticity must be smaller
than the long-run price elasticity
• If the price of a drug increases in the current period,
this will decrease current consumption (Ct) which in
turn reduces the marginal utility of consumption next
period and thus also reduces future consumption
• by symmetry, an anticipated increase in the price of
the addictive drug in the future should reduce
consumption in the present because the consumer is
forward-looking
39
Theory of Rational Addiction
• In summary, there are three main predictions
of this model:
– (1) The more heavily the future is discounted the
more likely that a consumption path is followed
that leads to addiction
– (2) Assuming a rational individual, the higher the
effective price of a drug (including opportunity
costs of consumption such as lost life-cycle
wages), the less likely that an individual will
become addicted
– (3) The price elasticity of demand for a drug will
be more elastic in the long-run than in the shortrun
40
Hyperbolic Discounting
• The Rational Addiction model has
been criticized for assuming that
individual makes time-consistent
choices
40
Hyperbolic Discounting
• Time-consistent choices are imposed by
assuming that an individual discounts the
value of future rewards according to an
exponential function
– future utilities U(Xt) are discounted by a weight δt
which is an exponentially declining function of t
(meaning that the value of future utilities will
decline by a constant proportion every period)
– An exponential function assumes constant discount
rates and assumes that an individual’s relative
evaluation of two rewards will depend only on the
amount of delay between receiving them
41
Hyperbolic Discounting
• One way of rationalizing time-inconsistent
behavior is to introduce time preferences so
that the individual discounts the value of
future rewards according to a hyperbolic
function where discount rates are declining
(Laibson, 1997)
• Delayed rewards are weighted by βδt where β
represents the preference for immediate
reward and δ expresses the preference for
reward delayed t periods, relative to a delay of
t+1 periods
42
Hyperbolic Discounting
• Hyperbolic functions have the potential to
exhibit preference reversals
• For instance, in the figure, the problem for
individual is to get through day without using
heroin
• The dashed line represents the present value
of scoring heroin, while the solid line is the
present value of going out his girlfriend
• Point T1 is the possibility of scoring heroin
(good) and T2 is the possibility of meeting his
girlfriend (even better)
43
Hyperbolic Discounting
Summed
Reward
Value
Preference
Reversal
Time (delay = t – tn)
T3
T1
T2
44 Hyperbolic Discounting
• Almost all day, the individual prefers the
idea of meeting his girlfriend, but
because of hyperbolic discounting, it
may be that as the opportunity to score
heroin comes closer and closer, he will
begin to value it more
• At T3, a preference reversal takes place,
illustrating the idea that drug addicts
tend to have a preference for ‘smallearly’ rewards over ‘later-larger’
rewards
45
Hyperbolic Discounting
• An initial preference for a ‘later-large’
reward over a ‘small-early’ reward
reverses as the latter approaches, ‘with
an advance choice of virtue changing to
an immediate choice of vice’ (Read and
Van Leeuwen, 1998)
• This explains the surrender to temptation
that is often characteristic of an addict’s
behavior
46
Price Elasticity of Demand:
Theory
• Moore (1973, 1990) –drug users will be
concerned with a drug’s ‘effective’ or
‘shadow’ price which includes the money
price, but also other components such as:
• the perceived risk of both acquiring and
taking the drug
• the probability of getting arrested,
convicted, fined, or imprisoned
• the ‘search time’ involved
46
Price Elasticity of Demand:
Theory
This search time will differ:
• from buyer to buyer
• from market to market
• and from time to time
and is essentially a measure of an illicit
drug’s availability
47
Price Elasticity of Demand:
Theory
• Becker et al. (1991) – provide an insight into
the possibility of different drug users having
different price elasticities
• Individuals with a greater preference for the
present (young, lower-income, less educated)
will attach a smaller monetary value to health
and other adverse effects of illicit drug use
than individuals with a greater preference for
the future (older, higher-income, more
educated)
47
Price Elasticity of Demand:
Theory
Younger and lower-income individuals will
typically react more to changes in the
money price of an illicit drug
Older and higher-income individuals are
more likely to respond to changes in future
harmful effects
48
Price Elasticity of Demand:
Theory
• Another related and consistent explanation is
that how elastic an individual’s demand is to
the money price depends on what fraction of
the full price is comprised of the money price
– For teenagers or young adults, who have a low
opportunity cost of time and may not be as futureoriented, price makes up a large fraction of the full
price
• Thus, a given change in the money price represents a
relatively large change in the full price leading to a greater
consumption response
49
Price Elasticity of Demand:
Theory
• Wagstaff and Maynard (1988) - market
demand curve has two elastic segments,
one at low prices and one at high prices,
and a general inelastic segment covering
the middle range of prices (doublekinked demand curve)
49
Price Elasticity of Demand:
Theory
Wagstaff and Maynard (1988)
• At low prices, when price increases, demand will fall
as recreational users leave the market and addicts
curtail consumption towards maintenance doses
• At very high prices, after a certain price, efforts to
raise funds become prohibitive and addicts will leave
the market (due to arrest, for example)
• Beyond some price, the market will only consist of
addictive users who exhibit price inelastic demand
50
Price
A Double-Kinked Demand
Curve for Drugs
Efforts to raise funds become prohibitive and
addicts leave market
Market only consists of
addictive users
Recreational users leave market and addicts
consume maintenance doses
Quantity
57 Drug Prohibition – The Welfare
Economics Approach
• You can take a look at our textbook for
some insights on the empirical evidence
about price-elasticities
• Estimating the price elasticity of demand
for illicit drugs has an important role to
play in the design and execution of drug
policy
57 Drug Prohibition – The Welfare
Economics Approach
• Estimating the price elasticity of demand for
illicit drugs has an important role to play in the
design and execution of drug policy
– Helps confirm that drug purchases are driven by
market forces
– Assists in evaluating the costs and benefits of drug
prohibition
• In an economics framework, enforcement and
apprehension work by raising the price of illicit drugs and
thus reducing consumption. So, if we find that drug users
are not very price responsive, and consumption does not
change by much, then perhaps the costs of policy
outweigh the benefits
– We will consider next the economics of drug
prohibition