ABSTRACT

This chapter explores rational addiction models and related empirical evidence. The rational addiction analyses suggest that bad habits and addictive behaviour are rational choices but may be associated with negative externalities and other market failures. Addiction and other bad habits reflect a complex interaction of economic and psychological factors. In the rational addiction models of Gary Becker, M. Grossman and K. M. Murphy, addiction is a voluntary choice but does nonetheless generate externalities and other forms of market failure. J. Gruber and B. Koszegi justify their assumption of no omitted variable bias on the basis that they are using high-frequency monthly data and preference structures wouldn’t have time to change over such a short period. For consumption data, they use the Vital Statistics Detailed Natality Data 1989––1996 on mothers’ smoking habits, averaged to give state average monthly consumption per capita.