reviewed by j.p. cull
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The demand for cocaine by young adults: a rational addiction approach by Michael Grossman and Frank J. Chaloupka. Reviewed by J.P. Cull. What is effective drug policy?. There has been discussion about lifting our prohibition on drugs - PowerPoint PPT PresentationTRANSCRIPT
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Reviewed by J.P. Cull
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There has been discussion about lifting our prohibition on drugs
As economists, we know that prohibition effectively raises the price, thus its removal would drop price
We would expect to see an increase in use, at a new lower price, but how much would use really increase?
Supply side, versus demand side policies
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Drug users aren’t rational, and only care about getting high, they derive an unreasonable amount of utility from it
Drug users don’t understand the future or have an unreasonable discount rate
There is no reasonable data on drug use that we can use to prove otherwise
Drug users do not act like people
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Becker and Murphy 1988 Two types of goods, Addictive, Non-
Addictive People are still rational utility
maximizers Utility is a function of consumption of
both types of goods and previously consumed addictive goods, u(yt,ct,ct-1)
Model used in everything from movie attendance to illegal drug consumption
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Lifetime Utility:
B is the discount rate Yt is the consumption of non-addictive
goods Ct is the current consumption of addictive
goods Ct-1 is previous consumption of addictive
goods Et is the error term
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Current Consumption:
By assuming a discount rate equal to the market rate of interest, and a quadratic utility function
Ct is consumption in time t B is the rate of time preference Pt is the price in time t θ assumed +, θ1 assumed – ℮ t is the error term
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University of Michigan’s Institute for Social Research, High-School Survey on alcohol/tobacco/drugs
Random Sample 15,000-19,000 high-school and ex-high-school students
1976-1985 Between 1 and 5 observations for each
person Focus on cocaine use: 2nd most popular
substance behind marijuana, pricing data available for many areas
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In addition to surveys the data was helped by the DEA’s and FBI’s STRIDE system
Makes drug buys, measures total price, total weight, purity, date, and other factors
Translates prices into Per Gram Price Divides by CPI to normalize values over
time Used to fill out the data set, with over
25,000 observations
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Using a TSLS fixed effect model, they re-estimated the parameters
Each variable that changes with time is transformed into a deviation from that single persons’ mean
Each variable that remains the same over time is deleted, along with variables where there is only one data point
This test confirms the past and future consumption effects, as positive and significant
And the price effect as negative
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“We find that cocaine consumption is quite sensitive to its price. A permanent
10% reduction in price would cause the number of cocaine users to grow by
approximately 10% in the long-run and would increase the frequency of use
among users by a little more than 3%. “ – (p458)
This means that demand is responsive to price
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This model shows the difference between a temporary change in price and a long term change:
“A temporary change that greatly raised the street price of cocaine may well only have a small effect on drug use, whereas a permanent war could have much bigger effects. For example, according to our estimates, a 10% price hike for 1 year would reduce total cocaine consumption by approximately 5%, whereas a permanent 10% price hike would lower consumption by 14%.” – (p459)
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It is doubtful that this model accurately estimates the change in drug use when a state suddenly decides against prohibition (elasticity changes)
Possible government tax policies could change the price from freefalling
Illegal markets may be more efficient than we give them credit for (the price doesn’t drop much)
Forbidden fruit or formerly forbidden fruit attractive to the young
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All this study does is draw a line If you know about previous use, and you
know about “future” use, draw a line, and you have a good estimate about “present” use.
Discount rate and uncertainty, assumed to be (1/1+r)
Are drug users really completely rational? (incomplete information, …)
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Grossman, Michael, and Frank J. Chaloupka. "The demand for cocaine by young adults: a rational addiction approach." Journal of Health Economics 17 (1998): 427-74.