Economic and other views of addiction: implications for the choice of alcohol, tobacco and drug...

Drug and Alcohol Review (1996) 15, 357-368

Economic and other views of addiction: implications for the choice of alcohol, tobacco and drug policies

DAVID BUCK, CHRISTINE GODFREY & MATTHEW SUTTON

Centre for Health Economics, University of York, York, UK

Abstract

It is the aim o f this paper to provide an overview of developments in implicit and explicit economic views of addiction, to contrast these perceptions with the views of other disciplines and discuss the implications for policy. Addictive behaviours have received considerable attention from disciplines other than economics. The nantre of addiction and the contribution of psychological, physiological and social factors have been strongly debated within the addictions field for many years. The views of economists are becoming increasingly important because economic studies of consumption, and tax revenue in the case of licit drugs, are one factor when framing policy. It is therefore crucial to know how economists have treated addiction. Have they neglected it and what are the implications if they have? This paper attempts to answer this question by reviewing and discussing the literature in depth and drawing out the implications for policy. [Buck D, Godfrey, C, Sutton M. Economic and other views of addiction: implications for the choice of alcohol, tobacco and drug policies. Drug Alcohol Rev 1996;15:357-368]

Key words: addictive behaviours; economic analysis; elasticity; drug policy.

Introduction

Addictive behaviours have received considerable attention from disciplines other than economics. The nature of addiction and the contribution of psychological, physiological and social factors have been strongly debated within the addictions field for many years. Despite widespread interest, the majority of contributions to the economic literature on drug consumption and the evaluation of policy responses have used standard economic models of consumer behaviour in which the possibility of addiction is not explicitly recognized. Economists' interest in explicitly contributing to the understand-

ing of addictive behaviour and to addressing its specific implications is relatively recent.

It is the aim of this paper to provide an overview of developments in implicit and explicit economic views of addiction, to contrast these perceptions with the views of other disciplines and discuss the implications for policy. The remainder of the paper is structured as follows. In the next section representative views of addiction drawn from the clinical and related literature are explored. Economists' views are 'teased-out' by investigating how economic models of consumer behaviour have been adapted in the

David Buck, BSc (Econ) MSc Research Fellow, Christine Godfrey, BA (Hons), Reader in Health Economics, Matthew Sutton, BA (Hons) MSc, Research Fenow, Centre for Health Economics, University of York, York YO1 5DD, UK. Correspondence to David Buck. Received 30 October 1995; revised version 20 May 1996; accepted for publication 5 June 1996.

0959-5236/96/040357-12 © Australian Professional Society on Alcohol and Other Dmgs

358 David Buck et al.

demand for drugs literature in the third section of the paper. In the fourth section the basic cost- benefit approach to deciding whether there is a role for government policy allowing for addiction is explained and how views of addiction influence the desirability of different policies is illustrated. In the final section some conclusions are drawn and priorities for further research are outlined.

The nature of addiction

A starting point for any discussion of addiction is to define the nature of the goods or behaviours which are considered to be potentially addictive. However, this is not a straightforward question. Views range from those who would deny that there was any notion of addiction to those who believe that all goods and behaviours, whether beneficial or harmful, are potentially addictive. While it is recognized that this is a stimulating topic in itself, it is outside the scope of this paper which only addresses addiction to psycho-active drugs, such as tobacco, alcohol and illicit drugs. The defining feature of psycho-active drugs is that consumption is associated with pharmacological effects. IndMduals may experience neural adaptation as a consequence of regular consumption which in turn influences future consumption decisions. While this separates drug consumption from other potentially addictive goods, it does not deny that there are other aspects of addiction that can be universally applied to a wider range of goods and behaviours.

An associated debate is whether addiction relates to all consumers or just a subset of the population. Clinicians are generally interested in those with the most severe problems, since these are the people that are most likely to demand treatment. A perception of addiction as the problem of a subset of individuals is therefore likely to predominate in this group. Consequently, their beliefs about the nature of addiction and appropriate policy responses are likely to be very different from public health professionals, whose concerns are with the wider public. This has implications for economic analysis which may attempt to explain behaviour or evaluate policies at either the market or indMdual level. Several influential views of addiction are discussed below.

The lay perspective

From a lay perspective, especially for illicit drugs, addiction means that individuals are unable to

control or stop their consumption after a few consumption occasions. The psycho-active nature of the drug is such that rapid addiction occurs and this rules out the possibility of addiction to most goods or behaviours.

The bio-medical vie~

The bio-medical view of addiction has been especially prevalent in the alcohol field [1]. Alcoholism is seen as a disease in which addicts are physio- logically unable to control their consumption. Some individuals are argued to be predisposed to addiction, possibly because of genetic factors.

Dependence

The notion of addiction as a disease which leads to a complete lack of control over consumption has been challenged by behaviourat studies. For most drugs there are consumers who use occasionally, by choice and for the benefits that accrue, rather than because of uncontrolled compulsion. Even in dinical populations, users have been found to be able to control their levels of consumption, and to abstain for considerable periods. This idea of addiction, which incorporates more flexible consumption patterns and a broader sub-section of the population, has been called dependence. This broader view is reflected within current diagnostic code conventions, such as ICD-10.

'Weakness of will' and inconsistent preferences

Essential to other views of addiction is the notion of craving [2]. Craving for a substance results in a 'diVided self, in which preferences do not appear to be consistent over time. Long-run preferences for abstinence or lower consumption are outweighed by the short-run preferences brought about by craving. In the clinical literature Heather [3] refers to this as 'weakness of will'. He sees weakness of will as occurring when a person firmly resolves to abstain from a drug only to break that resolve in the future. In his view, addictions are therefore a class of behaviours in which strong resolutions to desist from a certain behaviour are repeatedly broken in the face of a strong desire to carry out the behaviour. This is accompanied by complaints from the individual that it is out of his or her control.

Economic and other views of addiction 359

A set of factors may influence the development of such craving, including physical elements, such as neural adaptation and psychological, social and environmental factors. This complex array of influences may go some way to explain observed differences between addiction rates in different sub- groups of the population. In this sense, there is no one-to-one relationship between consumption patterns and addiction. Skog [2], proposes that the inconsistency in preferences may arise because consumers learn about addiction as they progress through their consumption careers. Therefore, while preferences are not constant over time they exhibit systematic variation.

As well as these four relatively distinct views of addiction, there are a variety of other phenomena commonly associated with the consumption of psycho-active drugs which do not constitute particular schools of thought about addiction. These include reinforcement, tolerance and withdrawal. Grossman [4], refers to Peele [5], in defining tolerance as meaning that given levels of consumption are less satisfying when past consumption has been higher. Reinforcement describes the process whereby past consumption increases the desire for future consumption. Withdrawal, on the other hand, represents the costs to the individual of reducing consumption or abstaining altogether. These latter characteristics of the consumption of psycho-active drugs, however, are not accepted by all as being essential to addiction. Several authors argue, for example, that tolerance and withdrawal are not necessary for addiction but are consequences of regular drug use [2,6]. Tolerance is not a prerequisite for addiction since it varies a great deal across drug types, and not in the same way as rates of addiction vary across substances. Similarly, withdrawal is not necessary, since consumption of some drugs by some individuals does not result in withdrawal costs.

In summary, it is clear that most of these different views of addiction are concerned with defining the nature of addiction once an individual has reached an addicted state. Few address issues surrounding the development of addiction. To describe observed patterns of addiction, theories ideally should also incorporate the influences of peer groups, socio- economic characteristics and the presence of what has been coined 'wet' and 'dry' cultures in the alcohol field, the general cultural acceptance of consumption [7,8]. These factors will influence the development of addiction by differentially affecting the costs

and benefits of consumption decisions at different points in an individual's consumption 'career'. A weakness of current clinical models is that they tend to focus purely on the individual in isolation from social and environmental influences. In contrast economists have tended to approach the consumption of psychoactive substances at the level of the market, not the individual.

Economics and addiction

The purpose of many economic analyses of drugs have been focused on the working of drug markets, not the behaviour of indMduals per se. Many economists have only considered addiction when simple economic models of drag and alcohol consumption yield unexpected and problematic results. However, there may be good reasons for the lack of attention to addiction. For an empirical demand study, the main purpose is generally to obtain an adequate representative model of market behaviour. Provided that the model is statistically valid, it may not be important that it cannot explain the behaviour of a sub-set of addicted individuals [9]. At the market level, addiction may not be sufficiently important to influence economic factors, such as price and income, on market demand. Even where addiction is quantitatively large it may not be of significant concern if it does not lead to unpredict- able market behaviour, the reason for a person's demand may be irrelevant to the operation of the market. In contrast, addicts may represent the totality of the addiction clinicians' concern.

Only with the development of economic theories of addiction for the behaviour of individuals have economists really addressed the definition of addiction. This section traces this development, first summarizing the characteristics of aggregate market models of psycho-active drugs and their implicit views of the consequences of addiction, and secondly discussing theoretical models of behaviour which have explicitly incorporated aspects of addiction.

Aggregate market models

Perfectly inelastic demand. A simplistic and com- mon early view of addictive behaviour, correspond- ing with the bio-medical approach that consumption is uncontrollable, is that consumption is perfectly inelastic to price changes, quantity consumed does


not fall with a rise in price [t0]. However, even if the bio-medical view is accepted and the market is saturated by addicts, this does not necessarily imply perfectly inelastic demand for all addictive drugs. As Roumasset & tladreas [11] demonstrate, the demand for a good will tend to be highly inelastic only if there are no close substitutes and if it represents a small part of the consumer's budget. While the former may be true for some addictive substances, the latter often is not. For many addicts expenditure on psycho-active drugs represents a large proportion of their budget; they will therefore tend to be more price-responsive than predicted because the income effect dominates. In other words, at high prices a further rise in price will force a cut in consumption because otherwise expenditure on necessities must fall.

Inelastic demand. In practice the majority of applied studies have not explicitly included any variables to reflect addiction. This literature, dating back to the pioneering work of Stone [12], has generally found that the demand for psycho-active drugs is price inelastic at the aggregate level but not perfectly inelastic. One interpretation of this is that drug markets are not saturated by 'bio-medical' addicts, but may contain either consumers with varying degrees of addiction, a sub-set of addicts, or the situation described above.

Habit formation. Despite the fact that the majority of empirical studies have paid little attention to the potentially addictive nature of drugs [13], simple models, particularly of tobacco consumption, have often proved inadequate. Some economists have therefore tried to explicitly include addiction variables in thdr models. This has led to the notion of 'habit consumption', often proxied by including a measure of past consumption in the modal. I f addiction is present then current consumption should be affected by past levds of consumption. Many authors [14,15] have adopted variations of the pioneering work of Houthakker & Taylor [16].

However, while this may capture some of the dements of addiction defined earlier, particularly the notions of reinforcement and tolerance, such empirical 'fixes' are not always based on strong theoretical foundations. A major limitation is that results from these types of studies can be interpreted in many different ways. At one level, since the world is dynamic and in a process of continual adjustment,

lags are associated with all economic behaviour. Lagged dependent variables are a feature of general estimation of all sorts of economic phenomena and therefore: '...any realistic formulation of economic models should involve some lagged variables amongst the set of explanatory variables' [17]. Simi- lax empirical forms can be derived by using past consumption as a direct proxy for habit or addiction [18], from specifying habit or addiction as a stock, or simply assuming that it takes time for consumers to adjust their demand to economic events. Past consumption may therefore simply be picking up a partial or adaptive adjustment process rather than any inherent habit or addiction effect. From the point of view of most notions of addiction it is also unlikdy tl'mt a simple lagged consumption term is sufficient to proxy addiction.

Ratchet models. A further class of models that have been estimated are ratchet models. The work of Young [19] provides a good example although there are other studies [20]. As with habit models, his model has generally been applied to the whole population or market, and no distinction is made betxveen different groups of consumers or differences in the degree of addiction. In his model, however, addiction, rather than being present through some lag effect via past consumption, is assumed to directly affect price and income responses with a ratchet response. This is a refinement of the inelastic demand prediction. Consumers are assumed to be more liable to take up consuming drugs at times when prices are low and incomes high, but then find it more difficult to reduce consumption when prices rise or incomes ~all. This is tested by including additional price and income variables which describe the real fail in prices and rise in incomes; details can be found in Pekurinen [20]. This could be interpreted as signalling rationality, but gradual learning of information about the addictive nature of the good [2] or as in the psychological literature as 'cognitive dissonance', the belief that despite knowledge of the possibilities of addiction and its consequences consumer's refuse to believe that it will happen to them personally.

Models with distinct groups of consumers. While most empirical studies have looked at market consumption, some economists have begun to address the notion that addiction is not necessarily rdevant for all groups of consumers in the market. Wagstaff


and Maynard [21] synthesizing the work of previous authors [22,23] hypothesized that the demand curve for illicit drugs is inelastic at high and low prices but relatively elastic in between. This results from the different behaviour of addicts and non-addicts. At low prices, demand is fairly responsive to price changes, since non-addicts and experimental users either change their consumption or enter/leave the market. At higher prices the market becomes dominated by addicts who are less responsive to price. However, at very high prices the demand curve may be more price-sensitive, as addicts either enrol in treatment programmes or engage in criminal activities which result in apprehension and exit from the market. The model does not offer guidance on the threshold values of price at which the slope of the demand curve will change. Nevertheless, there has been a recent attempt to test the hypothesis of shifts in slope in the demand curve for heroin [24].

The five classes of studies above concentrate on the impact of addiction on market demand through both positing that addiction would have a predict- able effect on the coefficients of standard demand functions and, more sophisticatedly, by attempting to directly model addiction in the demand function. However, none of these studies relate market behaviour to any consistent theory of individual behaviour or distinguish between the actions of those who are possibly addicted from those who are not at an empirical level. These issues have been addressed in disaggregated individual models discussed below.

'rational addiction' primarily associated with the work of Becket & Murphy [26] and associates Grossman & Chaloupka. These are important because they place the concept of addiction in a standard rational choice framework of an individual maximizing utility from consumption over time. In particular these models challenge the idea that addicts are not rational in the sense that addicts appear not to act according to their preferences. Since substance users often propound that they would like to stop consuming, and yet continue to consume a certain good, this is often taken to imply that they are irrational [2]. Becker & Murphy [26], however, argue that addictive behaviour can arise from a rational person's plans to maximize utility over time in the full knowledge that addiction may be the result. The comparative advantage of rational addiction theory is that, in contrast to most that went before, it expficitly models the effect of addiction on consumption. Following Grossman [4], the consumer is assumed to have a utility function of the following form:

U=U(~, C,, &)

in which: Yt is consumption of a composite non- addictive good, Ct is consumption of the addictive good and & is the stock of the addictive good. The addictive stock, &, is defined according to the equation:

& = ( I - a ) & - : + C - :

Disaggregated indiv4dual models

Cost of change models. Yen &Jones [25] used micro- level data to distinguish responses of individuals to economic and other factors when deciding whether to give up smoking or not. However, they focused on the consequences of withdrawal from addictive goods in their theoretical and empirical specifications; this draws on the notion that once addicted it is costly for individuals to change their behaviour. In their model addiction was assumed to result in some fixed cost of quitting, this cost being a function of past consumption and other characteristics. This study is concerned not so much with the process of how an individual becomes addicted but what may influence addicts to change behaviour.

Rational addiction. The most well known models of addiction in the economics field are the models of

where ~ is the per-period rate of depreciation. Becket & Murphy[26], unlike most addiction specialists, assume that addiction can be beneficial and is only harmful if 6U/fiS< O. This expresses the notion of tolerance, higher consumption now increases the addictive stock and lowers utility in the future. For rational addiction, reinforcement, bC/ c5S> 0, requires both that an increase in past use raises the marginal utility of current consumption, 82U/tCfiS>O and that the positive effect of an increase in & on the marginal utility of Ct exceeds the negative effect of higher St on the future harm from greater Ct. Becker & Murphy [26] show that time preference rates are important for the possibility of becoming addicted. In particular, in the current period, an addict may optimally choose to be addicted in the furore. However, once there, the individual realizes that not being addicted would yield greater utility, but the temporary reduction in


utility implied by quitting cannot be overcome. The greater the value attached to the present as opposed to the future (higher time preference) the more likely someone will choose a consumption pattern now which will lead to addiction in the future since current consumption is much more highly valued than the future consequences of it.

The rational addiction model is important and impressive because it yields testable predictions about the behaviour of addicts from the theory of individual behaviour. Arguably the most relevant of these are that addicts will be price-responsive, that addicts will respond to perceived permanent changes in price more than perceived temporary changes, that addicts will change their behaviour in response to future prices or expectations of such, and that the long-term price elasticity will be greater than that in the short-term. Many of these predictions are quite specific to the rational addiction model and are not intuitive in relation to addicts. The fact also that these predictions are testable with readily available data makes rational addiction a useful and powerfifl contribution to the literature. There has been empirical testing of these models and there is undoubtedly some support for its predictions [4]. It is also the first convincing attempt to explain why consumption which leads to addiction may be rational, given full knowledge about the consequences and likelihood of becoming addicted; in other words, addicts know exactly what they are doing. This has potentially important policy implications, discussed the penultimate section.

Addiction and the evaluation of policy choice

The aim of this section is to set out how different views of addiction may influence public policy towards addictive goods. It may do this in two fundamental senses: by altering the desirability of changing addicts behaviour for their own good; and by altering the likelihood of success of policies for which the target group is non-addicts, such as tax revenue raising and the maximization of social welfare. The consequences of addictive substances for social welfare policies, rather than addiction per se, has been of most interest to economists. This is because addictive drugs are a major source of tax revenue, in the case of licit drugs, and social costs in the case of both licit and illicit drugs. This section is presented in two parts: first in terms of how economists have approached evaluation questions;

and secondly in terms of how different views of addiction impinge on the potential effectiveness of different policy choices.

Addiction and the rationale for government intervention

As in the demand literature, the economic approach to evaluation has been at the market level, particularly focusing on addiction as a market failure. In essence, this work has not addressed different views of individual addiction. Frameworks have been developed for establishing whether there is potentially a rationale for government intervention and these are discussed first, followed by a review of some applied studies. These applied studies are intended to answer specific evaluation questions, such as the net benefit or cost of tax rises.

Frameworks for evaluating whether governments should intervene. Evaluation of whether the government should intervene in addictive goods markets involves identifying, measuring and valuing different costs and benefits associated with alternative public policies. For any government intervention to be justified the reduction in private and social costs must outweigh the ioss of consumer benefits from the change in consumption.

A number of proposed frameworks for analysing public policy towards addictive substances have been suggested. The best known clarifies what the social costs of addictive substances are, with reference to smoking, and explicitly includes the possibility of addiction [27]. This has been amended somewhat by Markandya & Pierce [28] and subsequently our- selves and is shown in Table 1.

This framework is useful because it distinguishes the costs to be considered for the addicted from those for the non-addicted. Although presented in terms of distinct categories, this may be more intuitive in terms of a 'sliding scale'. However, it should be noted that this framework does not help in s~ecifying which policies would be most effective, simply whether intervention is potentially justified.

This framework implies that when smokers are unaware of the adverse consequences of their actions and addicted the social costs tend to be higher (Box 1 in Table 1). Markandya & Pierce [28] consider that the social cost of tobacco addiction can be proxied by the value of production of tobacco products, the opportunity cost plus a proportion of


Table 1. An economic framework for assessing the desirability of public Jmlicy towards addictive goods: the social costs of smoking

Unaware of adverse consequences

Aware of adverse consequences

Addicted Not addicted

Lifetime costs of medical treatment due to smoking a + costs to the smoker of premature death + loss of earnings due to smoking- related sickness + net transfer payment (taxes--social security) to smokers relative to matched non-smokers over the lifetime of non-smokers + suffering of others due to premature death + suffering of the smoker due to smoking-related disease + opportunity cost of resources in tobacco production + externalities due to smoking

BOX 1

BOX 4?

BOX 3

BOX 1--(opportunity cost of resources used in tobacco production - a proportion, x, of tobacco taxation revenue)

BOX 2

BOX 1 + social security benefits paid to smokers during smoking-related illness - (costs to the smoker of premature death + loss of earnings due to smoking-related sickness + suffering of the smoker due to smoking-related disease + a proportion, x, of tobacco taxation revenue + opportunity cost of resources used in tobacco production)

BOX 4

Based on Markandya & Pierce (1989) with amendments to Box 3. 1 This can be negative if smokers fail to incur long-ran medical costs due to premature death.

tobacco tax revenue, x, reflected in the lack of these items in Box 2.

This deserves further consideration. Tobacco production is considered a cost because the addict is assumed to derive no benefit from smoking at all. Such a smoker has 'distorted choices' because (s)he is purchasing something that gives h im/her no benefit. Expenditure on cigarettes is therefore an 'over- valuation' of the benefits to the individual. The money could be spent on something else offering benefit. Tobacco taxation is not included as part of this opportunity cost to the addict because it is a transfer payment between groups in society and does not represent a true cost. However, a proportion of tax revenue, x, should be included as the social cost of addiction ~f taxation is levied in the sense of a Pigovian tax, i.e. in order to compensate for social costs. The scalar x represents the extent to which the 'purpose' of taxation is compensation for social costs.

The pert inent question in the case of unaware smokers is whether the costs of addiction, tobacco

production plus the proportion x of tax revenue are large enough to have an impact on policy decisions in comparison to the unaddicted case? Although for simplicity, x is often assumed to be unity, in applied studies even in this case the social costs are usually outweighed by other terms such as the value of life and external costs. Addict ion therefore seems to be a side-issue in the case of the unaware addict. However, this is dependent on the assumption that addicts receive no benefits at all from consumption and that the opportunity cost of tobacco production is a reliable proxy for the disbenefits to addicts. There is reason to believe that both of these may be underestimates. Recent theories of addiction suggest some addicts do receive benefits from consumption. Similarly, the opportunity cost of tobacco production will be an underestimate of an addict's 'willingness to pay' not to be addicted, unless the market consists only of other addicts with identical demand schedules. In reality, markets for addicted goods are not likely to be like this. The market price


does not necessarily fully reflect what an addict is • Mlli~tg to pay for drugs but what the average consumer is ~ l l ing to pay. Ceteris paribus, it might be anticipated that the market equilibrium price would be less than an addict would be prepared to pay.

Despite these problems, Box 3 (Table 1) is in many ways the most interesting. Markandya & Pierce [28] acknowledge that most consumers of drugs are to some extent aware of the risks they are taking and therefore the lower panel of Table 1 is perhaps the most relevant. The?" leave this box empty because '...box 3 presents problems of interpretation since it is not at all clear what awareness of risks combined with addiction actually implies' [28]. However, since rational addiction models directly fit this case, this box has been tentatively filled with costs external to the addict. This is equivalent to the non-addicted and aware case (Box 4). This is because, in contrast to other economic views of addiction, rational addiction models are grounded in standard economic theory, explicitly assuming that consumers are rational and have full knowledge of the future consequences of their actions. As a direct consequence, their decisions are sovereign. Addicts take into account all the information relevant to themselves and internalize the costs of their actions when making their consumption decisions. There is therefore no rationale for public policy to intervene in the interests of addicts. Only costs external to themselves should be considered as suitable territory for government intervention. However, this is based on the value judgement that the consumer is sovereign. There may be room for government action if the individual's decisions are not considered sovereign.

Applied evaluations of policy options. Despite the existence of conceptual frameworks, many applied studies of the social costs and benefits of addictive substances have explicitly ignored the consequences of addiction, implying that addiction does not exist, all addiction is rational or that there is not enough evidence on consumer benefits to include a quanti- tative estimate. This is particularly true of papers addressing the optimal taxation of addictive goods. A recent example where the potential effects of addiction have been ignored is that of Richardson & Crawley [29]. They compared the health benefits of reduced consumption with any loss in consumer surplus from an alcohol tax increase and concluded that for Australia there was sufficient evidence to

suggest that net social benefits would result from higher taxation on alcohol. All alcohol consumers were assumed to benefit from consumption and no adjustments were made to their consumer surplus measure.

Despite the fact that many studies which attempt to assess the desirability and optimality of tax policy towards addictive goods have not explicitly considered addiction, these studies may implicitly take the consequences of addiction into account. Since all such studies use some estimate of the price elasticity of aggregate demand to estimate changes in consumer surplus and taxation, they include the behaviour of addicted consumers in elasticity estimates, t tow reliable such elasticity estimates are in the absence of specific control for addiction is difficult to say. As argued previously, if addicts' expenditure is an insignificant proportion of total expenditure in the market, then it is likely to be a minor problem.

Implications for policy

The Markandya & Pierce [28] framework does not recommend policies to pursue in the presence of addiction. The views discussed in the second section and the demand studies reviewed in the third section are more useful in this context. Different concepts and views of addiction will affect the choice of policy in several ways. First, the theoretical approaches discussed in the second section rule out certain policies as being ineffective by definition and tend to focus on costs to individual addicts. In contrast the demand studies are essentially empirical and have implications for the practical success of demand and supply-side policies to reduce external and internal costs associated with addicts and others. The model of Becket & Murphy [26] impfies that only external costs, not those incurred by addicts, should be considered when designing policy, unless consumers are assumed not to be sovereign. Explanations of these points are set out below.

Views of addiction. The lay perspective implies that addicts are out of control of their consumption. With existing users, raising price through taxation and other measures will not therefore work by definition, although they may have an impact on preventing initial use. In general, however, it is the substance which is the problem and all policies should therefore be aimed at the supply-side,


increasing risk of detection and imposing heavy penalties in the case of illicit drugs. This view explains to some extent the 'crackdown' on crack and cocaine in the late 1980s [30].

Similar conclusions could be drawn from the bio-medical view of addiction. However, here it is the person who is defined as the problem. Some individuals, but not all, are unable to control behaviour. This implies that cracking down on supply may not be the optimal solution. Rather, individual-based policies such a~s abstinence, as advocated by Alcoholics Anonymous, or preventive measures based on genetic screening could be appropriate.

However, most addiction specialists see addiction as a broader, more complex and flexible concept, as represented by notions of dependence and craving. The implications of these are that the addict is in control to some extent and that therefore economic incentives could play a role. In addition the emphasis on the problems caused by addiction rather than the innate characteristics of the substance or individual implies more emphasis on policies to reduce problems rather than consumption per se. However, these are still primarily based on the individual and these make up the majority- of health care sector responses to addiction.

Demand studies. The demand studies are more useftd in many ways for broader public policy than the views of specialists who tend to focus, under- standably, on the consequences for addicts alone. In contrast to the non-economic literature on addiction, economics has until recently had little to say explicitly about policies towards addicts themselves. This is because economists analysing market demand have been concerned with the wider consequences of addiction, not addiction itsel£ Demand models attempt to explain the generality of behaviour in addictive goods markets. They are therefore potentially more useful when designing public policy to reduce the external costs of addictive goods.

The elasticities of the demand and supply curves are essential to predicting the effects of public policy but, in comparison to demand, supply has been little studied. The naive view of perfectly inelastic demand, consistent with the lay perspective, implies no role for supply-side enforcement policies in tackling addiction or d i r e @ reducing the external costs associated with it. However, it does offer a lucrative

source of tax revenue as compensation for external costs or to subsidize treatment agencies, depending on the proportion of taxation which is Pigovian. The possibility of less than perfectly inelastic demand opens more avenues for economic approaches, especially to supply-side measures to reduce the size of the market.

Refinements such as ratchet models introduce a new dimension in the sense of a dynamic framework. Consumers are more liable to consume drugs at times when prices are low and incomes high but find it difficult to quit when prices rise or incomes fall. This has important policy implications, implying that, following a period when prices fell, it would take a much larger rise in prices to restore consumption to previous levels. Supply-side enforcement policies may therefore be less successful than predicted if price-elasticities have been estimated based on a combination of increases and decreases in price.

The model of Wagstaff & Maynard[21] has further implications; this is one of the few studies which addresses the aggregate market effect of addicts' and non-addicts' differential responses. These authors hypothesize that the demand curve is elastic at high and low prices but inelastic in- between. At high prices even addicts leave the market by choice, enrol in treatment programmes or are more likely to be caught funding their addiction illegally; this leads to elastic demand. Similarly at low prices non-addicts are more likely to experi- ment. It is the 'middle section' of the demand curve which is inelastic, being dominated by addicts who can afford to stay in the market at those prices. This has interesting policy implications. Shifting the supply-curve is likely to be unsuccessful, in terms of reducing the size of the market, at medium prices but successful at high and low prices. Therefore, policy-makers should identify the proximity of the market price to the elastic and inelastic sections of the demand curve when planning policy. It is worth noting, however, that there appears to be little in the way of empirical support for this hypothesis.

Rational addiction. It seems that rational addiction models have crucial implications for public policy towards addicts. Because addicts take into account all the information relevant to themselves and inter- natize the costs of their actions when making their consumption decisions they in some sense choose to be addicted. The only rationale for government to


subsidize treatment agencies which encourage addicts to run down their addictive stock is external costs, unless governments do not accept consumer sovereignty.

However, this does not mean that there should be no intervention in addictive goods markets. I f the framework of Markandya & Pierce [28] shows that costs to others outweigh benefits then interventions are called for, to reduce addiction for the benefit of others. Indeed, one of the major predictions of rational addiction models is that addicts will be at least as price-responsive, if not more so, than non- addicts. The long-run price elasticity is also greater than that in the short-run. Temporary 'wars on drugs' such as that against crack and cocaine will therefore be less successful than interventions that change prices permanently [31].

Conclusions and further research

An interesting contrast emerges from examining the types of economic analysis which may be required by both policy makers and clinicians and the areas which economists may have the most interests. Clinical views of addictive behaviour have developed from an individual perspective. However, given observable differences in problems with psycho- active drugs across different population, social and environmental groups, clinicians have turned to disciplines such as economics in the knowledge that, if future problems with the consumption of addictive drugs are to be minimized, it is necessary to examine broader influences, including prices, on the whole population [8]. In contrast, economists have moved from a focus on the broad market, and these type of population influences, to a narrower focus on explaining individual behaviour.

There are many issues in this paper about the appropriate evaluation of policies which have been discussed but not resolved. There are two main ones which further research could usefully attempt to address. The first is the question of the 'valuation' of consumption to addicts. Is the economic notion of consumer surplus a meaningful concept for addiction? A useful step forward may be willingness-to- pay studies of addicts' consumption and desire to quit. Secondly, in market terms, this paper has focused almost exclusively on demand and has not addressed the other side of the equation: supply. There is an urgent need for supply-side studies, to study how firms react to the knowledge that they

may face addicted consumers [32] and in order to refine optimal taxation studies. Most studies which address optimal taxation assume that increases in taxes are fully reflected in price rises. This will only be true in the presence of perfecdy elastic supply in addictive goods markets. Jones & Posnett [25] sub- jected this assumption to sensitivity analysis in their study and concluded that ' . ..the impact of the shifting assumption on the revenue forecasts suggests that this is a matter which deserves careful study'.

The rational addiction model has been very successful in bringing addiction to the notice of main- stream economists although it needs further testing with micro datasets [33] and in countries other than the United States. However, what is not clear are the implications of the rational addiction model if some of the assumptions are relaxed. For example, what happens under conditions of uncertainty? One of the driving forces behind the process of becoming and staying addicted in the model is different time preference, or discount rates across consumers. Becker & Murphy [26] acknowledge that the poor and less educated tend to have higher discount rates, in the sense that they take account of the future consequences of their actions less than others, and therefore are more likely to 'choose' to become addicted in their model. This, however, begs the question of whether discount rates can be chosen. Those from middle-class and highly educated homes have, in some sense, their future possible paths mapped out for them. It seems plausible that the less educated have less knowledge, or are less certain, about the possible paths that their future will take. They therefore discount more highly because of greater uncertainty about the future. In other words discount rates are not functions of choice or inherited characteristics, but of uncertainty. Given the assumption that more certainty is preferred to tess, public policy to reduce this uncertainty, through general education, may lower people's discount rates and influence their likelihood of becoming addicted. There may therefore be a rationale for public policy towards addicts within the rational addiction framework, albeit under conditions of uncertainty. This is a concrete example of where consumer decisions, although remaining sovereign, may be influenced through public policy to attain a better outcome in tile eyes of society, possibly regardless of external cos t s .

However, the issue of consumer sovereignty needs to be explored further. Economists have been


reluctant to abandon a normative standpoint in which individuals' values are central to their own choices, it is one of the fundamental features of the discipline. One reason why new theories, such as rational addiction, have been developed is to show that utility-maximizing consumers can exhibit what appears to be irrational behaviour which may be regretted later. Therefore there has been very little, if any, economic literature in the addictions field which has challenged the view that indMduals are the best judges of their own actions, albeit possibly faced with limited information. The assumption thus far has been that the rationale for government action is external costs or the provision of information. However, in the general economic literature there is some discussion of the possibility that some goods may be merit or demerit goods, i.e. goods which are judged by society to have inherent 'good- ness' or 'badness' and whose consumption should be encouraged or discouraged over and above the value placed on them by an individual. In this case, consumers are no longer sovereign. The consequences of this approach for the study of addiction have not been assessed and, descriptively, may prove to be a possible explanation of current policy on addictive goods. The consequences of this for the study of addiction have not been thoroughly studied and this seems a promising avenue for research.

Acknowledgements

W e would like to thank the anonymous referee for thoughtful comments and suggestions which have improved this paper.

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