Harmful addiction

Addiction harms individuals and the rest of society. It poses a challenge to conventional CBA because it involves sovereign consumers apparently making mistakes. Although the neoclassical approach to addiction, the rational addiction model, does not adequately explain harmful addiction, it introduces the useful notion that the utility of current consumption can depend on the stock of prior consumption. Behavioral economics offers a number of explanations for addiction: non-exponential time discounting, presentism, cue-dependent consumption choices and costly self-control in the face of temptation. The latter provides some normative leverage: addictive consumption involves a loss of individual welfare when the individual would be willing to pay to avoid facing the tempting choice. Practical CBA can assess the welfare loss from addictive consumption if a marginal valuation schedule for non-addicted consumption can be distinguished from the market demand schedule. Unfortunately, it is currently unclear how to identify the non-addicted demand schedule from revealed preference data. Further, the task is complicated because consumption of most goods commonly classified as addictive involve both addictive and non-addictive consumption.