Friday, May 26, 2006



Anthony Boardman's Cost-Benefit Analysis text is considered by many to be the premier text (tome) for policy analysts. So I picked up the 3rd edition about a month ago on ebay. Glancing over it a bit last night. I came upon this section (p.90):

Intrapersonal Externalities: Consumption under Addiction
For some people, the consumption of a particular good today increases their demand for its consumption in the future. For example, exposure to classical music during childhood may contribute to a demand for such music in adulthood. Economic models of addictive goods assume that the amount demanded at any time depends on the amount of previous conusmption. Rational addiction occurs when consumers fully take account of the future effects of their current consumption. If current consumption is myopic or fails to take account the future risks, then addiction is not rational. For example, some children may fail to anticipate the consequences of tobacco addiction during their adulthood or some adults may fail to anticipate the risk that their casual gambling may become a disruptive compulsion. Such cases involve negative intrapersonal externalities -- harm imposed by current consumers on their future selves.

The presence of negative intrapersonal externalities brings into question the appropriateness of using changes in social surplus measured under market demand schedules as the basis for assessing the benefits of alternative policies. On the one hand, the demand schedule reveals the marginal willingness of the market to pay for additional units of the good. On the other hand, the satisfaction from addictive consumption may not actually make consumers better off--it avoids the pain of abstinence but does not provide as much happiness as would alternative consumption in a nonaddicted state. The stated desire and costly efforts made by many adult smokers to quit smoking suggest that they perceive benefits from ending their addiction. In other words, they wish they had not been addicted by their younger selves.

Should this actually be considered an externality? Yes, these potential future costs were not taken into account by the younger you, but are these costs actually assumed by society (presumably at a loss)? Isn't this really just a matter of expectations and asymmetric information on the part of the youth. For tobacco use in particular, Harvard's Kip Viscusi showed that youth actually over estimate the risks of smoking. So those "costly efforts" by adults to quit smoking may primarily be from the heavy subsidies by local, state, and federal governments, along with the Tobacco companies like Phillip Morris.

Also, I think he greatly down-plays the benefits of allegedly addictive goods and services.

Well, I think this certainly counts as an externality (and a clever one at that). The younger you is making decisions that impose costs on the older you that he doesn't take into account. If we exchanged younger you with a Railroad comapny and the older you with a wheat farmer, this would be exactly like the example Coase used in his paper on Social Cost.

But I think you make some excellent points. We could model it as externality problems or one of the ways you described it. There are all kinds of ways to tell the same story to tease out new bits of information.

I'm not sure if there is a best way to model the situation (you've thought about it a lot more than I have), but I think your post is an excellent illustration of the process of debate in economics (nothing is ever god given truth).

Jolly hoe, good show, and nice writing.
Well, thank you.

Part of the reason for writing this, was because it seems (to me, at least) inappropriate to count additional benefits not accounted for in youth as a "positive intrapersonal externality". The associated policy to correct this myopia, would also seem inappropriate.

So, if the positive one seems problematic, can we still use the negative?
Well, I would agree that the policy implications are probably impractical (and a little scary), I think things like this could still be modeled as an externality problem.

Flossing might be a good example. Flossing provides most of its benefits to the older self with good teeth and only leaves the younger self with hurting gums. Since the younger self doesn't realize most of the gains from flossing, the might perform less than the "efficient" ammount. IOW: "social welfare" between the young and old self could be increased by the younger self flossing more.

I would totally agree that, in practice, this is probably impossible to accuratley identify (like you pointed out on the phone, you can find externalities everywhere if you look hard enough), but i think it could still be used to tell useful stories.
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