Life cycle consumption of a harmful and addictive good

DAVID GOLDBAUM [*] This article demonstrates that the endogenous desire to quit smoking can result from a rational consumption path chosen at the time the consumer begins smoking. This result is obtained without relying on hidden costs or unknown preferences. A finite-lived agent chooses a path of consumption of a harmful and addictive good to maximize present discounted utility. The consumer chooses his consumption rate to account for the future health consequence of smoking and the withdrawal costs of quitting. A consumer may choose to smoke even if it means a lowered utility level for the majority of the time spent smoking. (JEL D91, C61, I12) I. INTRODUCTION Some of what we consume for pleasure can be harmful. Economists assume that consumers take measure of the potential harm and balance it against the pleasure derived from consumption. When both the pleasure and the harm occur at the time of consumption, the decision is straightforward. Some goods, though, impose a cost borne at some future date, requiring intertemporal planning. These present a greater challenge to the consumer and to the economist trying to explain the consumer's behavior. At times, observed behavior implores us to question whether the consumer is properly weighing the costs and benefits in a manner that maximizes his or her utility. Theoretically, for each item under consideration, the rational consumer properly balances the lifetime benefits derived from the consumption against the lifetime costs. Some observed behavior seems to contradict this rational approach to consumption. In particular, it is common for people to begin smoking cigarettes during their youth, only to endogenously make a decision to quit at a future date. To integrate this behavior with rationality, modelers have proposed hidden costs, multiple selves, changing preferences, or other strategies that limit the decision-making ability of the youth. In all of these cases, for some consumers the decision to smoke is a "mistake" made during youth that has to be reversed, at some cost, as a middle-aged adult. This article aims to demonstrate that a lifetime path of consumption in which a person consumes a harmful (and addictive) good while young, and quits at some later date, is a path that is perfectly consistent with rational behavior. It is not necessary to assume that mid-life quitters are displaying irrational or time-inconsistent behavior. If all information regarding a good's harmful properties is revealed, some consumers will still choose a path that requires quitting mid-life. This paper primarily examines the consumption of cigarettes, but also includes analysis of a nonaddictive unhealthy good. Both of these harmful goods provide the consumer with immediate pleasure but at the cost of decreasing life expectancy. Background Becker and Murphy [1988] (BM) introduced the concept of rational addiction, the idea that addicts are forward-looking rational consumers. Present consumption choices reflect not only current utility considerations and budget constraints, but also incorporate the anticipated impact of present consumption on future utility and budget constraints. BM examine the behavior response of addicts to exogenous shocks. Changes from a steady state, including the desire to quit, originate only from exogenous shocks such as a change in the relative price of the good or a revelation about the detrimental health consequences of the addictive good that alters the consumer's utility derived from consumption. The model offers no mechanism by which smokers may choose to alter behavior endogenously. In contrast to BM's smokers, many of today's smokers appear to quit in absence of an external shock. Anyone who began smoking after 1966 has been subjected to the legislated health warnings appearing on cigarette packages since that time. [1] Antismoking messages in radio and television advertisements during the 1950s and 1960s also helped to make the health consequences of smoking common knowledge. …