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Economic Perspectives on Addiction: Hyperbolic Discounting and Internalities


  • Fritz L. Laux

    (Northeastern State University)

  • Richard M. Peck

    (University of Illinois at Chicago)


This paper provides an introduction, with critical interpretations, to the use of hyperbolic discounting as a model of behavior for the consumption of addictive goods. The exponential and hyperbolic discounting models are carefully reviewed, with particular emphasis on the implications for time consistency. We then present a simple explanation of the logic of market failure resulting from internalities and the economic inefficiency that can result when time inconsistent choices have intertemporal impacts. We then briefly review, with commentary, key work from the experimental and broader empirical literature that can be used to assess and critique the hyperbolic discounting model.

Suggested Citation

  • Fritz L. Laux & Richard M. Peck, 2009. "Economic Perspectives on Addiction: Hyperbolic Discounting and Internalities," Journal of Economic Insight (formerly the Journal of Economics (MVEA)), Missouri Valley Economic Association, vol. 35(2), pages 1-22.
  • Handle: RePEc:mve:journl:v:35:y:2009:i:2:p:1-22

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    JEL classification:

    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior


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