Mental Illness and the Demand for Alcohol, Cocaine and Cigarettes

The purpose of this paper is to estimate the effect that mental illness has on the demand for addictive goods. Mental illness could affect the level of consumption of addictive goods and could affect the price elasticities of addictive goods. Demand theory suggests that mental illness would affect consumption if mental illness affected marginal utility. In addition, mental illness would affect the price elasticity if mental illness affected the rate at which marginal utility diminishes. The empirical models allow for endogeneity between mental illness and addictive consumption since prior research suggests such a relationship. The results show that individuals with a history of mental illness are 25 percent more likely to consume alcohol, 69 percent more likely to consume cocaine and 94 percent more likely to consume cigarettes. Individuals with a history of mental illness are responsive to price although the price elasticites differ somewhat from whose without mental illness. These results provide an added justification for higher taxes and other supply reduction activities since they show that these policies are effective with this high participation group. The results also suggest that an additional method of reducing the consumption of addictive goods is to subsidize the treatment of mental illness.