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Reviewed by J.P. Cull

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

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Reviewed by J.P. Cull

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  1. The demand for cocaine by young adults: a rational addiction approachbyMichael Grossmanand Frank J. Chaloupka Reviewed by J.P. Cull

  2. What is effective drug policy? • 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

  3. The “Common Knowledge” Model of Addiction • 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

  4. The Rational Addiction Model • 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

  5. Analytical Framework • 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

  6. Analytical Framework cont. • 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

  7. Data • 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

  8. STRIDE • 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

  9. Sensitivity Analysis • 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

  10. Results • “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

  11. Results cont. • 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)

  12. Limitations according to the authors • 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

  13. Limitations according to me • 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, …)

  14. Citation • 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.

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