Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: It is well-known that cigarette smoking and the use of other addictive goods is harmful to health. Still, some people smoke cigarettes and drink alcohol in their daily life. The consumption of addictive goods seems, therefore, to be the anti-thesis of rational behavior. In this paper, however, it is demonstrated that a rational individual, in the sense that he maximizes his well-being while anticipating the future consequences of his choices, may in fact choose to consume addictive goods. Specifically, the two-good extension of the rational addiction model is demonstrated and related to relevant policy questions. For instance, should one encourage the use of smokeless tobacco in smoking cessation programs? According to the empirical results, the answer is no. Further, should one discourage smoking by increasing the tax on cigarettes? Again, the answer is no.

Keywords: Alcohol; Bootlegging; Cigarette Smoking; Complements; Rational addiction; Substitutes.

JEL-codes: I10

15 pages, October 7, 2003

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