Health economics.

• Author: Grossman, Michael
• Position: Pricing, usage and effects of use of cigarettes, alcoholic beverages and cocaine

In the five years since my last report on the NBER's Program on Health Economics, members of the program have focused on the economics of substance use and abuse and on the determinants of pregnancy resolutions and their relation to infant and early childhood health. Studies in the former area consider the effects of prices, taxes, sanctions, and advertising on the use of such harmfully addictive substances as cigarettes, alcohol, and illegal drugs. They also consider the effects of marijuana, cocaine, and alcohol consumption on marriage and divorce, out-of-wedlock births, participation in welfare, employment and unemployment, and crime. Studies in the latter area investigate the effects of public policies on whether pregnancies result in live births or induced abortions, the effects on infant health outcomes of expansions in Medicaid income-eligibility thresholds for pregnant women and young children, and the process by which families allocate resources to the health and development of their children. All of this research takes seriously the distinction between health as an output and medical care as one of the many inputs in the promotion and maintenance of health.

Price Sensitivity of Cigarettes, Alcohol, and Illegal Drugs

The governments of the United States and many other countries have chosen to regulate some addictive substances (for example, cigarettes and alcohol) via taxation; minimum-age purchase laws; restrictions on consumption in schools, the workplace, and public places; and stiff fines for driving under the influence of alcohol. Other substances (for example, cocaine and marijuana) are outlawed completely. The prices of these substances will rise because of taxation, other forms of regulation, and bans. Thus, measuring their responsiveness to price is important in determining the optimal level of taxation and the impacts of legalization. Contrary to conventional wisdom, our studies find that the consumption of addictive substances is quite sensitive to price.

Current antismoking initiatives in the United States focus on curtailing youth smoking. This is not surprising, as numerous studies show that 90 percent of all smokers begin the habit as teenagers. Thus cigarette control policies that discourage smoking in this age group may be the most effective way to achieve long-run reductions in smoking in all segments of the population. Using nationally representative samples for the 1990s, Frank J. Chaloupka and I show that excise tax hikes, which result in higher cigarette prices, have large negative effects on teenage smoking.(1) Our study capitalizes on the substantial variation in cigarette prices in the U.S. states, mainly caused by the very different state tax rates on cigarettes. The proposed settlement of the Medicaid lawsuits brought against the tobacco industry by the attorneys general of most states, and rejected by the U.S. Senate in June 1998, would have raised the price of a pack of cigarettes by approximately 34 percent. based on our estimates, this price hike would have reduced the number of teenage smokers by approximately 24 percent. This would have translated into more than 1.3 million fewer smoking-related premature deaths in the current generation of people 17 and younger.

Chaloupka and Henry Wechsler report that smoking by college students is almost as responsive to price as smoking by high school students.(2) Chaloupka, John A. Tauras, and I indicate that a similar finding holds for the use of smokeless tobacco by teenage males.(3) Chaloupka and Rosalie Liccardo Pacula find that the benefits, in terms of curtailments in youth cigarette smoking, attributable to price hikes are not shared equally by all demographic groups, though.(4) For example, among male teenagers, a 10 percent increase in the price of cigarettes shrinks the number of whites who smoke by about 9 percent and of blacks who smoke by 16 percent. The effects are much smaller for white female teenagers and are nonexistent for black female teenagers.

Alcoholic beverage prices also vary among areas of the United States for the same reason that cigarette prices vary: states tax these beverages at very different rates. Chaloupka, Ismail Sirtalan, and I capitalize on this variation to estimate the demand among individuals between the ages of...