ECON 440 Lecture Notes - Lecture 6: Time Preference, Market Failure, Seat Belt
13 Jun 2018
School
Department
Course
Professor
Market failure?
○
Individual decision-making?
○
Government intervention in health behaviors and prevention
•
Focus on taxation
○
How do governments intervene in practice?
•
Outline
Smoking, cancer screening, exercise
○
There may also be significant uncertainty regarding whether the future cost or benefit will actually
occur
○
In the context of health behaviors and prevention, costs and benefits to the individual are often separate in
time
•
e.g. set alarm to go to the gym next morning -> hit snooze and don't go
▪
Many behaviors are more in line with time-inconsistent preference (not sticking to rational, beneficial
decisions)
○
Are individuals' time preferences constant over time?
•
Economists also emphasize how economic factors (prices, income, availability of substitutes, etc.) affect
people's health and preventive behaviors
•
Present vs. Future Costs and Benefits
"The Taxes of Sin: Do Smokers and Drinkers Pay their Way?" Manning et al, 1988
•
Addiction is a function of tolerance, reinforcement, and withdrawal
○
Preferences are time-consistent
○
Current consumption depends on past and future prices, past and future consumption, and individual's
rate of time preference
○
The patterns we see don't really fit with this
▪
These are strong assumptions
○
Rational addiction (1988)
•
Time preferences are inconsistent
○
People underestimate risk of addiction, misperceive negative effects of smoking
○
Has many of the same predictions as the rational addiction model, but can also account for regret over
starting smoking and failed attempts to quit, as well as the use of commitment devices.
○
More in line with what we see IRL
○
Quasi-rational addiction (2000)
•
Evolution in the Economics of Smoking
Conventional economic theory and measurement, incorporating advances from quasi-rational addiction
models?
•
Rational choice framework is inappropriate, given evidence that tobacco use is an irrational behavior?
•
The fact that evidence shows that they do throws doubt on both "extremes" (rational/irrational
behavior)
○
Graphic warning labels shouldn't cause quitting under either model
•
Evolution in the Economics of Smoking
Chaploupka, et al. 2014
○
"Applying assumptions from traditional economic theory, while reasonable when assessing the economic
impact of regulations on many consumers goods, can result in grossly distorted estimates of benefits and
costs when applied to the analysis of tobacco products, given the market failures caused by addiction and
imperfect and asymmetric information that are exacerbated by initiation of product use, for most, during
adolescence."
•
Chaploupka et al. conclude "revealed preference" to smoke doesn't indicate any benefit, losses of smokers'
•
The Costs of Anti-Smoking Interventions
Lecture 6 - The Economics of "Bads" and of Prevention
Monday, January 29, 2018
7:37 PM
ECON 440 Page 1
