Economics of Drug Addiction Economics of Leisure Recreation, and Sports Econ 291:20 Roberto...

Economics of Drug Addiction

Economics of Leisure Recreation, and Sports

Econ 291:20

Roberto Martinez-EspiñeiraWinter 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’ self-completion 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

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%

7 Global Illicit Drug Use – 2003-04

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’

9 Lifetime Prevalence of Illicit Drug Use in

USA, Australia, and Europe

0

5

10

15

20

25

30

35

40

45

Aust

ralia

(200

1)

Den

mar

k (2

000)

Engl

and

& W

ales

(200

2/03

)

Finl

and

(200

2)

Fran

ce (2

000)

Ger

man

y (2

000)

Italy

(200

1)

Net

herla

nds

(200

0/01

)

Nor

way

(199

9)

Portu

gal (

2001

)

Spai

n (2

001)

Uni

ted

Stat

es (2

003)

% re

port

ing

use

Marijuana

Cocaine

Amphetamines

Ecstasy

10 Last Year Prevalence of Illicit Drug Use

in USA, Australia, and Europe

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Aus

tral

ia (

2001

)

Den

mar

k (2

000)

Eng

land

& W

ales

(200

2/03

)

Fin

land

(20

02)

Fra

nce

(200

0)

Ger

man

y (2

000)

Italy

(20

01)

Net

herla

nds

(200

0/01

)

Nor

way

(19

99)

Por

tuga

l (20

01)

Spa

in (

2001

)

Uni

ted

Sta

tes

(200

3)

% r

epo

rtin

g u

se Marijuana

Cocaine

Amphetamines

Ecstasy

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


• (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


• (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


• (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


• (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


• (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


• 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)


• 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


• 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


• 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


• 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


• 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


• 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


• 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


Instantaneous payoff

B

A

C

D

payoff to drug given history of drug use payoff to alternative activity given history of drug use weighted average payoff to all actions

State dependence (proportion of times using drug or engaging in alternative activity)


• 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


• 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)


• 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


• 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


• 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


Here is an equation that can help spell outthe 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)


• 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



• 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 short-run

40 Hyperbolic Discounting

• The Rational Addiction model has been criticized for assuming that individual makes time-consistent choices


• 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


• 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


• 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)


T3 T1 T2

SummedRewardValue

PreferenceReversal

Time (delay = t – tn)


• 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 ‘small-early’ rewards over ‘later-larger’ rewards


• 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


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


• 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)


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


• 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 future-oriented, 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


• 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 (double-kinked demand curve)


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 A Double-Kinked Demand Curve for Drugs

Price

Quantity

Efforts to raise funds become prohibitive andaddicts leave market

Market only consists ofaddictive users

Recreational users leave market and addictsconsume maintenance doses

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

Economics of Drug Addiction Economics of Leisure Recreation, and Sports Econ 291:20 Roberto...

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