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

Some points to note:

1. Rational consumers maximize their utility from preferences as they try to speculate the future consequences of their choices. Addictions seem to be the antithesis of rational behavior. As the title of the paper indicates, it is claimed that addictions, even strong ones, are usually rational in the sense of involving forward-looking maximization with stable preferences. A rational framework permits new insights into addictive behavior. People get addicted not only to alcohol, cocaine, and cigarettes but also to work, eating, music, television, their standard of living, other people, religion, and many other activities. Therefore, much behavior would be excluded from the rational choice framework if addictions have to be explained in another way.

2. The paper derives conditions that determine whether steady-state consumption levels are unstable or stable and the unstable steady states are crucial to the understanding of rational addiction. It also derives the effects of permanent changes in income on the long-run demand for addictive goods and in the current and future cost of addictive goods. It is seen that consumption of addictive goods responds less to temporary changes in prices than to permanent changes. In addition, the effects on future consumption of changes in current prices become weaker over time when steady-state consumption is stable, but they get stronger when the steady state is unstable.

3.It is seen that cigarettes and heroin are more addictive than sweaters and sherbet. Yet not all smokers and heroin users become addicted.Other things remaining the same, individuals who discount the future heavily are more likely to become addicted. The level of incomes, temporary stressful events that stimulate the demand for addictive goods,and path of prices also affect the likelihood of becoming addicted.

4. Anticipated future increases in price reduce current consumption of addictive goods because their consumption at different moments of time are complements. This implies that temporary changes in the price of an addictive good have smaller effects on current consumption than (compensated) permanent changes.

5. Strong addictions to smoking, drinking, and drug use are usually broken only by going cold turkey, that is, by abrupt withdrawal. It shows that cold turkey is consistent with rational behavior. Rational persons end strong addictions only with rapid and sometimes discontinuous reductions in consumption.