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Public economics has positive and normative objectives; aims are both to describe the effects of public policies and to evaluate them. To formulate models of human decision-making with two components – one describing choices, and the other describing well-being. Traditionally, economists have made no distinction between the behavioral and welfare components of economic models. Such a distinction has not been necessary because standard welfare analysis is grounded in the doctrine of revealed preference. Behavioral economists have proposed a variety of models that raise difficult issues concerning welfare evaluation. No consensus concerning appropriate standards and criteria has yet emerged. Broadly speaking, there are two main sides of thought. One school insists on strict adherence to the doctrine of revealed preference for the purpose of economic policy evaluation. A second school of thought holds that behavioral economics can, in principle, modify, relax or even jettison the principle of revealed preference for the purpose of welfare analysis.
Revealed preference is an attractive political principle because it guards against abuse (albeit quite imperfectly in practice). Once we relax this doctrine, we potentially legitimize government condemnation of almost any chosen lifestyle on the grounds that it is contrary to a “natural” welfare criterion reflecting the individual's “true” interests. If we can classify, say, the consumption of an addictive substance as contrary to an individual’s interests, what about choices involving literature, religion, or sexual orientation? If choices do not unambiguously reveal an individual's notions of good and bad, then “true preferences” become the subject of debate, and every “beneficial” restriction of personal choice becomes fair game
There is widespread agreement that normative criteria should respect the principle of individual sovereignty, which holds that notions of good and bad for society should be rooted inthe notions of good and bad held by the affected individuals. This principle instructs policy analysts to act as each individual's proxy when comparing alternative policies. It precludes the analyst from imposing his or her own value judgments.
Basis for welfare evaluations according Bernheim and Rangel rests on the assumption 3: Fixed lifetime preferences. Each individual’s ranking of lifetime statecontingent 1) Coherent preferences. Each individual has coherent, well-behaved preferences. 2) Preference domain. The domain of each individual’s preference rankings is the set of lifetime state-contingent consumption paths. 3) Fixed lifetime preferences. Each individual’s ranking of lifetime state contingent consumption paths remains constant across time and states of nature. 4) No mistakes. Each individual always selects the most preferred alternative from the feasible set.
The consumption of addictive substances raises important social issues affecting members of all socioeconomic strata, and citizens of virtually every nation. Even within jurisdictions, public policy toward various addictive substances is far from uniform, despite the commonalities suggested by their shared clinical classification. Policies range from laissez-faire to taxation, subsidization (e.g. of rehabilitation programs), regulated dispensation, criminalization, product liability, and public health campaigns. Each alternative policy approach has passionate advocates and detractors. Despite sharp disagreements about the ideal treatment of addictive substances, there is reasonably widespread agreement that most existing policies work poorly. Prohibitions on certain substances, like marijuana, lack credibility among younger, who fail to see why alcohol is singled out as socially acceptable. While the incidence of criminal activity among drug addicts is relatively high, it is important to acknowledge that drug related-crime is, to a significant extent, a consequence of current policy, rather than a justification for it. Criminalization promotes black markets, fosters organized crime, enriches criminals, and contributes to a culture of violence. While existing policies have serious drawbacks, alternatives are also potentially problematic. For example, the high incidence of alcohol abuse and smoking, along with the attendant social costs, at a minimum raise serious concerns about the potential consequences of across-the-board legalization. The apparent intractability of social problems related to addiction underscores the importance of creatively and openly rethinking policy strategies.
Prior to the 1990s, neurological theories of addiction were based on the “pleasure principle”; it was widely believed that people start using drugs to achieve a pleasurable “high”and; continue using them despite a deterioration of the high (a phenomenon known as “tolerance”) to avoid unpleasant feelings associated with cravings and withdrawal. These hedonic properties are easily incorporated into standard models of consumer choice. From a normative perspective, the theory of rational addiction makes no distinction between addictive substances and other goods. Accordingly, the standard welfare theorems apply. It follows that government intervention is justified only if markets for addictive substances function imperfectly. There are two main concerns in this regard. First, if people are either poorly informed or misinformed about the effects of addictive substances, they may make poor decisions. As long as the government can provide relevant information more effectively and efficiently than private markets, educational policies (e.g., public health campaigns) are potentially beneficial. Second, the consumption of addictive substances may generate externalities. For example, driving under the influence leads to accidents, addicts commit crimes to support their habits, and addiction can be devastating to family members. The standard policy prescription for externalities involves a Pigouvian tax per-unit of the substance equal to the marginal external damage that it imposes on others.
What, then, makes addiction a distinctive phenomenon? 5 important behavioral patterns distilled from the extensive body of research on addiction in neuroscience, psychology, and clinical practice. 1) Unsuccessful attempts to quit. Addicts often express a desire to stop using a substance permanently and unconditionally but are unable to follow through. Short-term abstention is common while long-term recidivism rates are high. Thus, recidivism often occurs after users have borne the most significant costs of quitting, sometimes following years of determined abstention. 2) Cue-triggered recidivism. Recidivism rates are especially high when addicts are exposed to cues related to past drug consumption. Long-term usage is considerably lower among those who experience significant changes of environment 3) Self-described mistakes. Addicts often describe past use as a mistake in a very strong sense: they think that they would have been better off in the past as well as the present had they acted differently. They recognize that they are likely to make similar errors in the future, and that this will undermine their desire to abstain. When they succumb to cravings, they sometimes characterize choices as mistakes even while in the act of consumption. 4) Self-control through precommitment. Recovering users often manage their tendency to make mistakes by voluntarily removing or degrading future options. They voluntarily admit themselves into "lock-up" rehabilitation facilities, often not to avoid cravings, but precisely because they expect to experience cravings and wish to control their actions. They also consume medications that either generate unpleasant side effects, or reduce pleasurable sensations, if the substance is subsequently consumed. Severe addicts sometimes enlist others to assist with physical confinement to assure abstinence through the withdrawal process. 5) Self-control through behavioral and cognitive therapy. Recovering addicts attempt to minimize the probability of relapse through behavioral and cognitive therapies. Successful behavioral therapies teach cue-avoidance, often by encouraging the adoption of new life-styles and the development of new interests. Successful cognitive therapies teach cue-management, which entails refocusing attention on alternative consequences and objectives
Given the crucial role that public goods and externalities play in many important policy problems, one of the main challenges ahead for public economics is to build and test better models of public goods, and to apply them to basic questions in public finance, political economy, and mechanism design. We are still far from a satisfactory model of public goods that can become a new workhorse for economic applications across the board. However, based on the rapidly growing body of evidence concerning the psychological and neural processes at work, including research on the neural basis of empathy, punishment, and cooperation such a framework is at the horizon. Given the number of likely forces at work – reciprocity, social norms, social emotions, social signaling, and so forth – it seems likely that a relatively complex and multifaceted approach is needed. Yet it is also likely that the discovery of new organizing principles will permit useful simplifications that render the problem more tractable.