Question

For the "Theory of Rational Addiction"article by Becker and Murphy

What is the main question/behaviour that the paper models?

What are the costs and benefits of that behaviour for different agents in the model?

Conclusion of the model?

Answer 1

Theory of rational addiction is based on the hypothesis that addictions can be modeled as specific kinds of rational, forward-looking, optimal consumption plans.

The paper models that addictions, even strong ones are generally rational wherein they consider forward looking maximization. That addicts have stable preferences and make utility-maximizing decisions and they are capable of taking into account the consequences of the excessive consumption on the future scenario. Consumption is motivated by immediate payoff of consumption and partly by effects it has on the individual in the future. Thus addictive behaviour becomes a subset of rational behaviour.

Costs such as rehabilitation, extra taxation, costs of second-hand smoke for people who don't smoke, cost of low birth rate. Benefits are by way of satisfaction one derives by consuming the product, and able to feed that hunger and need.

Conclusion of the model is that forward-thinking addicts are consistent with behaviours of addiction, such as price responsiveness, increased consumption because of stressful lifestyle, etc.