Rational Addiction and the Effect of Price on Consumption

Legalization of such substances as marijuana, heroin, and cocaine surely will reduce the prices of these harmful addictive drugs. By the law of the downward-sloping demand function, their consumption will rise. But by how much? According to conventional wisdom, the consumption of these illegal addictive substances is not responsive to price. However, conventional wisdom is contradicted by Becker and Murphy's (1988) theoretical model of rational addiction. The Becker-Murphy (B-M) analysis implies that addictive substances are likely to be quite responsive to price. In this paper, we summarize B-M's model of rational addiction and the empirical evidence in support of it. We use the theory and evidence to draw highly tentative inferences concerning the effects of legalization of currently banned substances on consumption in the aggregate and for selected groups in the population. Addictive behavior is usually assumed to involve both "reinforcement" and "tolerance." Reinforcement means that greater past consumption of addictive goods, such as drugs or cigarettes, increases the desire for present consumption. But tolerance cautions that the utility from a given amount of consumption is lower when past consumption is greater. These aspects of addictive behavior imply