NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Smoking, Drinking, and Drug Use Respond to Price Changes

"Trends in marijuana use likewise suggest that the number of youths who use this substance rises as the real price falls, and vice versa. Heroin is uncommon among high school students, but cocaine use leaped from 5.6 percent of high school seniors in 1975 to 13.1 percent in 1985 at the same time that the real price of cocaine fell by approximately 64 percent."

By studying data compiled over the past three decades, NBER Research Associate Michael Grossman determines that, contrary to conventional wisdom, changes in price can explain a good deal about the consumption rates of such addictive substances as tobacco, alcohol, and illegal drugs. In Individual Behaviors and Substance Abuse (NBER Working Paper No. 10948), Grossman finds further that the consumption-price relationship should be useful in formulating taxation, regulation, and legalization policies concerning these substances. His findings are consistent with a growing body of evidence indicating that addictive substances are more sensitive to price than previously believed.

Grossman first looks at trends in the real prices of cigarettes, alcohol, cocaine, heroin, and marijuana (the money price of each substance divided by the Consumer Price Index for all goods) and at corresponding trends in their consumption for the period from 1975 through 2003. Despite vigorous anti-smoking and anti-drunk driving campaigns real cigarette prices fell between 1975 and 1980 and between 1992 and 1997, while real alcoholic beverage fell except for the years 1990-1992. These declines can be attributed in part to stability (in nominal terms) of federal excise tax rates. Since 1997 the real price of cigarettes has risen by 72 percent in response to the settlement of the lawsuits filed by 46 state attorneys general against cigarette makers and because of federal and state tax increases.

The drop in the real price for beer, wine, and spirits is even more notable. Between 1975 and 1990 the declines were 20 percent, 28 percent, and 32 percent respectively. Since federal tax rates on all three beverages were raised in 1991, real price declines amounted to 9 percent for beer, 13 percent for wine, and 8 percent for spirits.

Meanwhile, during the same period (1975-2003) the real price of one pure gram of cocaine, according to Drug Enforcement Agency data, fell by 89 percent, and the price of one pure gram of heroin fell by 87 percent. Marijuana prices fluctuated over the decades, but this is harder to measure because marijuana prices are not adjusted in terms of purity.

Grossman then looks at trends in cigarette smoking, alcohol consumption, and binge drinking for the same period. He uses data from the Monitoring the Future (MTF) project compiled annually since 1975 by the University of Michigan's Institute of Social Research. The MTF studied the three aforementioned trends among high school seniors and found declines in all three between 1975 and 2003. Trends in marijuana use likewise suggest that the number of youths who use this substance rises as the real price falls, and vice versa. Heroin is uncommon among high school students, but cocaine use leaped from 5.6 percent of high school seniors in 1975 to 13.1 percent in 1985 at the same time that the real price of cocaine fell by approximately 64 percent.

The reduction in smoking trends is consistent with the marked increase in the real price of cigarettes. Indeed, the dramatic increase in the price of cigarettes since 1997 explains almost all of the 12-percentage-point reduction in the cigarette participation rate since that year. Alcohol use and abuse cannot be correlated indisputably with the reductions in the real prices of alcoholic drinks without factoring in other elements. These include changes in the minimum legal drinking age and the redefining of blood-alcohol levels in regard to drunk driving. However, when these factors are taken into account, the 7 percent increase in the real price of beer between 1990 and 1992 attributable to the Federal excise tax hike on that beverage in 1991 explains almost 90 percent of the 4-percentage-point reduction in binge drinking in that period.

When Grossman looks at statistics on heroin, cocaine, and marijuana users of all ages who were either arrested or treated at hospital emergency rooms between 1978 and 2002, the relationships between substance prices and usage rates cannot be determined with absolute certainty. Nevertheless, he says, enough evidence exists that harmful addictions are sensitive to price, and that the government can discourage these behaviors by taxation or by bans.

Grossman cautions: "I have not provided enough evidence to conclude in a definitive manner whether the use of cocaine, marijuana, and other illicit substances should be legalized. I have, however, highlighted three factors that have been ignored or not emphasized in the debate concerning legalization. The first is that legalization is likely to have a substantial positive effect on consumption if prices fall by as much as that suggested by many contributors to the debate. The second is that these price reductions, while almost certainly sizable, may have been greatly overestimated. The third is that legalization and taxation - the approach that characterizes the regulation of cigarettes and alcohol - may be better than the current approach."

Grossman says he hopes he has "convinced the reader to treat with a significant amount of skepticism propositions such as 'the demand for illegal drugs is not sensitive to price; tremendous price reductions will occur if drugs are legalized; and legalization and taxation is not a feasible policy option'."

-- Matt Nesvisky


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