AN EMPIRICAL ANALYSIS OF ALCOHOL ADDICTION: RESULTS FROM THE MONITORING THE FUTURE PANELS

In a panel of young adults, we find that alcohol consumption is addictive in the sense that increases in past or future consumption cause current consumption to rise. The positive and significant future consumption effect is consistent with the hypothesis of rational addiction. The long‐run price elasticity is approximately 60% larger than the short‐run price elasticity and twice as large as the elasticity that ignores addiction. Thus, a tax hike policy to curtail consumption or abuse may not have a favorable cost‐benefit ratio unless it is based on the long‐run price elasticity. (JEL 110)