Individual Behaviors and Substance Use: The Role of Price

Michael Grossman

NBER Working Paper No. 10948
Issued in December 2004
NBER Program(s):Health Economics, Children

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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Document Object Identifier (DOI): 10.3386/w10948

Published: 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

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