Lagged Demands and a “Perverse” Response to Threatened Property Rights

Rational addiction, lagged demands and the efficiency of excise taxes: Revisions of standard theory

“…The major difference is that their behavioral model is more refined and their purpose was primarily to develop an economic theory of "addiction," which is a general concept intended to suggest a tie between current and future consumption of a good or activity. In contrast to Lee and Kreutzer (1982), Becker and Murphy (1988) suggest their analysis may explain, for example, the differences in the consumption behavior of young and old, the tendency of overweight people to go on "crash diets" even when they may only want to lose a modest amount of weight, or alcoholics who become "teetotalers" when they decide to curtail their drinking. Old people may be less concerned about addictive behavior, everything else held constant, than the young.…”

“…In addition, the exact nature of the goods that have been widely assumed to fit the dictates of the theory -tobacco and alcohol -may not be the most efficient goods to tax, precisely because they have inelastic short-run demands. Lee and Kreutzer (1982) have cleverly argued that, for some purposes, demands should be viewed as interdependent, with consumption in the future critically tied to consumption in the current time period, whatever the elasticity of the current demand (or whatever the technical capacity of consumers to respond to price changes in the current time period). To facilitate discussion, the two authors (1982: 580) employed the notion of the "lagged demand," or the complimentarity of current and future consumption:…”

“…Hence, Lee and Kreutzer (1982) maintain, quite reasonably, that the future demand for a product depends upon the current price. Behind such an obvious point lies important insights that might otherwise go unrecognized from the usual view of demand (and, as we will see, excise taxes).…”

“…Also, the conventional treatment of demand holds that the potential for future threats to the stability of property rights could lead to "over-production" during the current time period. Lee and Kreutzer (1982) suggest that any looming threat to property rights can cause some firms -those facing lagged demands -to reduce production (or the exploitation of resources), hike the current price, and extract whatever profits remain. Becker and Murphy (1988) have more recently developed a similar line of argument.…”

“…Becker and Murphy's (1988) analysis of the complimentarity of consumption of a given good over time suggests that people will not always adjust marginally to changes in the parameters of consumption, one of which is surely the presence, absence, or prospects of excise taxation. Lee and Kreutzer's (1982) analysis of the lagged demand curve indicates that any threat to the stability of future property rights -through the imposition of excise taxes or anything else -can have what would be considered, viewed from the accepted paradigm, perverse consumption behavior. Excise taxes in many essential regards represent threats to current and future property rights.…”