Abstract

We model economic decisions as stemming from urges. The magnitude of the urge is a function of previous consumption. Welfare gains from satisfying an urge vary with the nature of the urge. An urge is "dysfuntional" if people are willing to incur costs to stop themselves from gratifying that urge. The simple framework we develop captures the essential features of other, more complex models of addiction and problems of self control. We apply the model to analyze cigarette smoking. Our main results are that, under not implausible conditions, making cigarettes more addictive can reduce smoking and making cigarettes more harmful can improve the average health of the population.