13.2 Theories of demand

Because many people are highly dependent on tobacco-delivered nicotine and persist in smoking despite recognising that tobacco products are dangerous, many early economists theorised that tobacco use was an irrational behaviour and not suitable for conventional economic analysis.¹ Other economists simply ignored the addictive nature of tobacco products.

Later studies explicitly addressed the addictive nature of cigarette smoking. The economic models of addiction underlying such research can be divided into three groups:

• Imperfectly rational models of addictive behaviour
• Models of myopic addictive behaviour
• Models of rational addictive behaviour.²

13.2.1 Imperfectly rational addiction model

Imperfectly rational addiction models assume that the rational, far-sighted part of a person wants good health and a long life but that their efforts to quit are repeatedly undone by the ‘wayward’ part of their personality that quite simply ‘adores’ smoking. Proponents of imperfectly rational addiction models hypothesise that consumption will fall sharply in response to price increases, but will then drift back again with time.

13.2.2 Myopic addiction model

The myopic addiction model assumes that addicted smokers are short-sighted. Myopic addiction theorists predict that factors such as price and income will affect uptake of smoking but that once addicted patterns of consumption are well established, individuals tend to ignore or discount future costs (both monetary and health related). They hypothesise that, while decreases in price will increase consumption and increases in price will reduce consumption, the effect of price increases will be much smaller than the effect of any price decreases.

13.2.3 Rational addiction model

The rational addiction model by contrast rejects the proposition that smokers behave myopically. It asserts that even addicted individuals do take into account future costs. The model assumes that addicted smokers make a rational choice, weighing up the pleasure of current smoking and the unpleasantness of withdrawal that comes with quitting on the one hand and the cost of current and continued smoking and the long-term health effects on the other. Different people will make different decisions depending on how much they value good health, how unpleasant they believe it will be to quit, and how much financial pressure they are under. Individuals also differ in the extent to which they prefer short-term over long-term benefits. Nevertheless, the choice an individual makes will take all relevant factors into account and be a rational one. Proponents of the rational addiction model such as Becker and Murphy³ have demonstrated that current consumption of an addictive good tends to be inversely related not only to the current price of the good but also to the past and predicted future prices.^4,5 The model also suggests that more-educated and older people will be responsive to both new information and to price increases, and that less-educated and younger people will be much less responsive to information about long-term effects and relatively more responsive to immediate changes in price.

The rational addiction model was popular among many theorists and researchers over the late 1980s and the 1990s, but has been criticised on several grounds. First, it implies that individuals have good foresight: a very accurate picture of what the future is going to be like. In reality however, it is evident that some people give little thought to the future. While they may be able to recite some of the diseases caused by smoking, they do not fully appreciate the nature and extent of health risks and may not be able to accurately envisage what their life would be like if they became very ill or disabled due to smoking. Second, the model would predict that individuals rarely regret past decisions about consumption, a theory not borne out in interviews with current smokers, almost all of whom regret ever having started smoking.⁶ Third, critics argue that it might be that smokers do not actually choose future consumption. Rather, by continuing to smoke they are choosing only current consumption: future consumption happens to them rather than being chosen by them.

References

1. Elster J, Ulysses and the Sirens: studies in rationality and irrationality. Cambridge: Cambridge University Press; 1979.

2. Chaloupka FJ and Warner KE. The economics of smoking, in The handbook of health economics.  Newhouse J and Cuyler A, Editors. New York: Elsevier Science; 2000. p 1539-627 Available from: http://econpapers.repec.org/bookchap/eeeheachp/1-29.htm.

3. Becker G and Murphy K. A theory of rational addiction. The Journal of Political Economy, 1988; 96(4):675–700. Available from: http://www.drugtext.org/library/articles/becker02.htm

4. Becker G, Grossman M, and Murphy K. Rational addiction and the effect of price on consumption. The American Economic Review, 1991; 82(2):237–41. Available from: http://www.drugtext.org/library/articles/becker1.htm

5. Becker G, Grossman M, and Murphy K. An empirical analysis of cigarette addiction. The American Economic Review, 1994; 84(3):396–418. Available from: www.soc.washington.edu/users/matsueda/Becker%20AER.pdf

6. Fong G, Hammond D, Laux F, Zanna M, Cummings K, et al. The near-universal experience of regret among smokers in four countries: findings from the International Tobacco Control Policy Evaluation Survey. Nicotine & Tobacco Research, 2004; 6(suppl. 3):S341–51. Available from: http://www.informaworld.com/smpp/content~content=a753998174~db=all~order=page