Valuing Regulations Affecting Addictive or Habitual Goods

Abstract

The analysis of regulations affecting addictive or habitual goods has drawn considerable controversy. Some studies have suggested that such regulations have only small welfare benefits, as consumers value these goods despite health benefits from quitting, while other studies suggest that information or behavioral problems make existing consumption decisions a poor guide to welfare evaluation. We examine potential utility offsets to health benefits of regulations affecting addictive or habitual goods theoretically and empirically. Our analysis focuses on individuals who consume these goods only, ignoring other social costs and benefits. Theoretically, we show the importance of several factors including: money saved in addition to health improvements; differentiating steady-state utility losses from short-term withdrawal costs; lack of utility loss for people dissuaded from starting to consume the good; and accounting for utility consequences of explicit or implicit cost increases. Our empirical analysis considers regulations that affect smoking. To measure the welfare cost of smoking cessation, we divide the population into those with more and less rational smoking behavior and use the valuation of smoking from more rational smokers to impute values of losses for less rational smokers. Our results show that the utility cost of smoking cessation is small relative to the health gains in people for whom withdrawal costs are the main utility loss of quitting, and even among people who have some ongoing loss, the utility offsets represent 20%–25% of the health gains. While marginal smokers induced to quit by regulations can be expected to have low or no steady-state loss, even this higher estimate is far below prevailing estimates of the utility cost of smoking used by the Food and Drug Administration and other analysts.