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Individual Behaviors and Substance Use: The Role of Price

  • Michael Grossman

I discuss economic approaches to the demand for harmfully addictive substances and estimate time-series demand functions for the period from 1975 through 2003. My estimates suggest that changes in price can explain a good deal of the observed changes in cigarette smoking, binge alcohol drinking, and marijuana use by high school seniors. For example, the 70 percent increase in the real price of cigarettes since 1997 due to the Medicaid Master Settlement Agreement explains almost all of the 12 percentage point reduction in the cigarette smoking participation rate since that year. The 7 percent increase in the real price of beer between 1990 and 1992 due to the Federal excise tax hike on that beverage in 1991 accounts for almost 90 percent of the 4 percentage point decline in binge drinking in the period at issue. The wide swings in the real price of marijuana explain 70 percent of the reduction in particpation from 1975 to 1992, 60 percent of the subsequent growth to 1997, and almost 60 percent of the decline since that year. I conclude with implications for tax policy and for the lively and contentious debate concerning the legalization of marijuana, cocaine, and heroin.

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File URL: http://www.nber.org/papers/w10948.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10948.

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Date of creation: Dec 2004
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Publication status: published as Substance Use: Individual Behavior, Social Interaction, Markets and Politics, edited by Bjorn Lindgren and Michael Grossman. Volume 16 of Advances in Health Economics and Health Services Research. Amsterdam: JAI, an imprint of Elsevier Ltd., 2005, pp. 15-39
Handle: RePEc:nbr:nberwo:10948
Note: HE CH
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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  2. Michael Grossman & Frank J. Chaloupka & Charles C. Brown, 1996. "The Demand for Cocaine by Young Adults: A Rational Addiction Approach," NBER Working Papers 5713, National Bureau of Economic Research, Inc.
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  6. Christopher J. Ruhm, 1995. "Alcohol Policies and Highway Vehicle Fatalities," NBER Working Papers 5195, National Bureau of Economic Research, Inc.
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  8. Michael Grossman & Frank J. Chaloupka & Ismail Sirtalan, 1995. "An Empirical Analysis of Alcohol Addiction: Results from the Monitoring the Future Panels," NBER Working Papers 5200, National Bureau of Economic Research, Inc.
  9. Carpenter, Christopher, 2004. "How do Zero Tolerance Drunk Driving Laws work?," Journal of Health Economics, Elsevier, vol. 23(1), pages 61-83, January.
  10. Patrick M. O'Malley & Michael Grossman & Frank J. Chaloupka, 2001. "Marijuana and Youth," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 271-326 National Bureau of Economic Research, Inc.
    • R. L. Pacula & M. Grossman & F. J. Chaloupka & P. M. O'Malley & L. Johnston & M. C. Farrelly, 2000. "Marijuana and Youth," NBER Working Papers 7703, National Bureau of Economic Research, Inc.
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  12. Gary S. Becker & Kevin M. Murphy & Michael Grossman, 2004. "The Economic Theory of Illegal Goods: The Case of Drugs," NBER Working Papers 10976, National Bureau of Economic Research, Inc.
  13. Jonathan Gruber & Jonathan Zinman, 2001. "Youth Smoking in the United States: Evidence and Implications," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 69-120 National Bureau of Economic Research, Inc.
  14. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
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  17. Henry Saffer, 1989. "Alcohol Advertising Bans and Alcohol Abuse: An International Perspective," NBER Working Papers 3052, National Bureau of Economic Research, Inc.
  18. Lewit, Eugene M & Coate, Douglas & Grossman, Michael, 1981. "The Effects of Government Regulation on Teenage Smoking," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 545-69, December.
  19. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1991. "Rational Addiction and the Effect of Price on Consumption," American Economic Review, American Economic Association, vol. 81(2), pages 237-41, May.
  20. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
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  26. Frank A. Sloan & Jan Ostermann & Christopher Conover & Donald H. Taylor, Jr. & Gabriel Picone, 2006. "The Price of Smoking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262693453, June.
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  28. Eugene M. Lewit & Douglas Coate, 1981. "The Potential for Using Excise Taxes to Reduce Smoking," NBER Working Papers 0764, National Bureau of Economic Research, Inc.
  29. Sara Markowitz, 1999. "The Price of Alcohol, Wife Abuse, and Husband Abuse," NBER Working Papers 6916, National Bureau of Economic Research, Inc.
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  33. Greg Coleman & Michael Grossman & Ted Joyce, 2002. "The Effect of Cigarette Excise Taxes on Smoking Before, During and After Pregnancy," NBER Working Papers 9245, National Bureau of Economic Research, Inc.
  34. Markowitz, Sara & Grossman, Michael, 2000. "The effects of beer taxes on physical child abuse," Journal of Health Economics, Elsevier, vol. 19(2), pages 271-282, March.
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  36. Philip DeCicca & Donald Kenkel & Alan Mathios, 2002. "Putting Out the Fires: Will Higher Taxes Reduce the Onset of Youth Smoking?," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 144-169, February.
  37. Friedrich Schneider, 2001. "What Do We Know About the Shadow Economy?," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 2(4), pages 19-32, October.
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