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The price elasticity of opium in Taiwan, 1914–1942
Journal of Health Economics 18 Ž1999. 795–810 www.elsevier.nlrlocatereconbase
The price elasticity of opium in Taiwan, 1914–1942 Jin-Long Liu a , Jin-Tan Liu b,) , James K. Hammitt c , Shin-Yi Chou d a
b
National Central UniÕersity, Taiwan National Taiwan UniÕersity and Academia Sinica, Taiwan c HarÕard UniÕersity, USA d Duke UniÕersity, USA
Abstract Between 1895 and 1945, the Japanese colonial government virtually eliminated opium use in Taiwan by licensing and treating existing users, prohibiting sales to others, and raising the price. We evaluate these policies using a two-part model to describe the fraction of the population using opium and consumption among users, and the rational addiction model by Becker et al. Ž1991.. We confirm that opium is addictive and find no evidence supporting the rational addiction hypothesis. Demand is price-elastic with estimated shortand long-run demand elasticities of y0.48 and y1.38. These results have implications for control of other addictive substances. q 1999 Elsevier Science B.V. All rights reserved. JEL classification: D12; I18 Keywords: Opium; Price elasticity; Taiwan
) Corresponding author. Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei Ž100., Taiwan. Tel.: q886-2-2351-9641 ext. 520; fax: q886-2-2321-5704; E-mail: [email protected]
0167-6296r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 6 2 9 6 Ž 9 9 . 0 0 0 2 3 - 5
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1. Introduction A key question concerning demand for addictive drugs lies in assessing the impact of a change in price on quantity demanded ŽGrossman, 1999.. Economists measure such a response as the elasticity of demand for a good. The estimation of a drug’s demand elasticity has long been an important issue in debates about drug legalization policies such as the discussions in the works of Erickson Ž1969., Eatherly Ž1974., Silverman and Spruill Ž1977., White and Luksetich Ž1983., Benson and Rasmussen Ž1991., and Konrad Ž1994.. If demand is highly inelastic, then a total prohibition policy that aims at increasing the price to drug users will have little effect on consumption. Rather, the price increase will result in more spending for the drug, thus increasing the profit to drug suppliers. Due to lack of data, empirical literature on this issue is rare. Most existing studies rely on the use of self-reported drug use data. For example, Nisbet and Vakil Ž1972. used data collected from interviews with college students to estimate the demand for marijuana. The price elasticity of demand ranges from y0.7 to y1.0. Saffer and Chaloupka Ž1995. linked a sample from the National Household Survey of Drug Abuse with data on drug prices from the Drug Enforcement Administration. The estimated participation price elasticity for heroin is about y0.90 to y0.80 and the participation price elasticity for cocaine is about y0.55 to y0.36. Grossman et al. Ž1996. employed the panel survey of high school seniors conducted each year since 1975 by the Institute for Social Research of the University of Michigan. They found that cocaine consumption by young adults is addictive and the model is consistent with the hypothesis of rational addiction. The estimated long-run price elasticity is about y1.5 and 70% larger than the short-run price elasticity. The main problem regarding the use of self-reported drug consumption data is that there is no objective method to examine its accuracy. Consumption may be under-reported because of its social undesirability and illegality. Information about drug prices is also difficult to obtain. Although Becker and Murphy Ž1988. presented a theoretical model of rational addiction, they did not study illegal drugs empirically. Becker et al. Ž1991. suggest that price responses of drug addicts are similar to those of persons addicted to smoking, heavy drinking, and gambling. In a recent paper, van Ours Ž1995. provides the first study on the price elasticity of addictive drugs using the rational addiction model and actual transaction data. Based on opium consumption from the Dutch East Indies, 1923–1938, he found the short-run price elasticities of opium use were about y0.7, and long-run price elasticities were about y1.0. He also estimated that the price elasticity of the annual number of opium users ranged from y0.30 to y0.40. Our paper provides additional empirical evidence on this issue. During the period of Japan’s colonization of Taiwan Ž1895–1945., the Japanese government established an Opium Monopoly Bureau to produce and sell opium to licensed addicts. Those who were diagnosed by physicians as addicts could legally be
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prescribed opium, not only for short-term pain relief, but also to maintain their habit over long periods. 1 In order to discourage opium consumption, the Japanese colonial government adopted several policy instruments such as registering and licensing addicts, setting a high price for the drug, and providing drug education programs. These policy instruments were similar to those adopted in the Dutch East Indies. The Japanese colonial government of Taiwan collected and published detailed annual information concerning opium consumption, revenues, licensing, and registration. Based on this actual transaction information, we apply a two-part model and the framework of Becker et al. Ž1994. to analyze the demand for opium. The empirical models measure total opium consumption for the period 1914–1942. The results indicate that opium consumption is addictive. The overall short-run price elasticity is about y0.48. The long-run price elasticity is about y1.38. Our results support the argument that demand for drugs by addicts is elastic. The paper is organized as follows. Section 2 describes the opium policies and consumption in colonial Taiwan. Section 3 uses the two-part and myopic–rational addiction models to analyze the opium demand function and discusses the short-run and long-run price and income elasticities. Section 4 presents conclusions.
2. Opium policies and consumption during the colonial period In 1894, China was involved in a dispute with Japan about Korean sovereignty. This issue precipitated the first Sino–Japanese war, which ended in the defeat of China. In the negotiations that ensued, the Ching dynasty administration of China ceded Taiwan to Japan. For the next 50 years Ž1895–1945., Taiwan was a Japanese colony. Prior to colonization, smoking opium was legal and had been a popular custom. It is estimated that about 10% of the population smoked opium. From 1865 to 1894, opium imports to Taiwan were the largest import by value, accounting for 45–75% of total imports. 2 How to deal with this issue became one of the most difficult tasks given to the governor-general of the new colonial administration. Although opium was strictly prohibited in Japan, the governor was hesitant to impose the same policy on Taiwan.
1
The designation of opium use as a medical problem was known as the British system. Addicts are given prescriptions by physicians to treat their disease. In 1868, the British Parliament passed the Pharmacy Act, which restricted the sale of opium to pharmacist’s shops. This was the first law that brought the use of opium under the control of the medical profession. It is consistent with the belief that addiction is a medical problem and should be handled by physicians ŽMcKim, 1996.. 2 Ho Ž1978., Table 2.3.
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Fig. 1. Number of licensed opium users and quitters in Taiwan, 1900–1942.
In a policy recommendation to the colonial administration, Goto Shimpei, 3 the director of the Health Administration Bureau of Japan and later appointed the head of the Civil Administration Bureau of Taiwan, warned that if strict opium prohibitions were insisted upon for the colony, and if ‘‘those who violated the law were sentenced to death,’’ then ‘‘more than two divisions of Japanese soldiers would be needed to maintain order’’ ŽChow, 1958.. Goto thought it more realistic to eliminate the habit of opium use gradually over several decades. In December 1895, with the support of the Ministry of Internal Affairs and the supervisor of the Military Medical Administration, the governor-general of Taiwan decided to adopt Goto’s recommendation and the Congress of Japan passed the governor-general’s proposal in February 1896. In January 1897, an opium monopoly system was implemented. 4 The colonial government founded the Opium Monopoly Bureau, which had the exclusive right to produce and sell opium in Taiwan. Under this system, opium was designated for medical use. Wholesale and retail opium merchants and opium smoking shops had to apply for a license from the government. Chartered opium
3
Goto Shimpei studied medicine and served as a physician with the Japanese military forces during the first Sino–Japanese war. After the war, he served as public health advisor for the colonial administration in Taiwan. In February of 1898, he was selected by Kodama Gentaro, the fourth governor-general, to head the Civil Administration Bureau in Taiwan, and held this position until 1906. 4 Similar systems were adopted by the British colonial government in Burma and by the Dutch colonial government in Java. See the work of van Ours Ž1995..
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Table 1 Distribution of registered opium smokers by year and age. Note: Data from To Ž1935. Yearrage
Currentrpreviousa
Smokers Male
Female
1920 20–29 30–39 40–49 50–59 60–69 70q
56 2291 3944 15,664 8183 2149
12 359 1928 2369 1546 531
1930 20–29 30–39 40–49 50–59 60–69 70q
1 488 2669 6986 6886 2573
1940 20–29 30–39 40–49 50–59 60–69 70q
0 6 366 1530 3011 2235
a
Male
Female
1 124 595 1361 1138 647
8.71 1.16 1.77 0.44 0.31
10.33 1.66 0.71 0.48 0.42
0 1 97 330 642 445
6.00 0.75 0.57 0.43 0.32
1.00 0.78 0.55 0.47 0.39
Ratio of current smokers to smokers in same age cohort 10 years earlier.
pharmacies were established to engage in the sale of opium. 5 Those who were diagnosed by medical doctors as addicts were given a license by the government so they could purchase opium from chartered pharmacies and could use opium legally. Using opium without a license was strictly prohibited and punished. 6 Registration of legal opium users started in 1900. In September 1900, there were 169,064 registered addicts, representing 6.3% of the population. Other users failed to register because of fear of prosecution. In 1903 and 1908, the government allowed additional addicts to register, but new licenses were difficult to obtain after 1908. The opium ordinance was revised in 1929. Under the new guidelines, the government adopted a more severe policy toward addicts; 3884 were asked to undergo compulsory medical treatment. For this purpose, the government estab5 Licensed merchants numbered 2659 in 1900, 1046 in 1910, 769 in 1920, 517 in 1930, and 303 in 1940. 6 From 1905 to 1942, 34,895 people, more than 900 per year, were prosecuted for illegal opium use.
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lished a central hospital for addicts in Taipei and special wards in hospitals elsewhere on the island. By the end of 1942, the number of addicts had decreased to 3624, or just 0.056% of the population. Fig. 1 shows the total number of opium users and the number of addicts who quit and surrendered their licenses from 1900 to 1942. The number of opium users decreased gradually as users died or quit. The number quitting each year varied in response to medical treatment programs. Table 1 shows the age and sex distribution of licensed users during different periods. Throughout the period, opium smoking was primarily a male habit. The licensing program led to a rapid aging of the opium-using population. Because few new users were registered after the early years, the distribution of opium users became increasingly concentrated in older age groups. By 1920, almost 80% of registered smokers were aged 40 and above, and by 1940, the fraction increased to 95%. Quitters accounted for about one-quarter of the decline in registered users during the first decade of the policy, and a smaller fraction in later years. After 1920, changes in the number of users in each cohort over time are broadly similar to the 10-year survival rates for opium addicts. To discourage consumption, the Opium Monopoly Bureau sold opium at a high price. The amount of monopoly profit was three times higher than that of import duties levied during the Ching administration. Fig. 2 shows the nominal and real opium price in Taiwan dollars per kilogram. The nominal price was increased from 1897 to 1919 and then remained stable for almost two decades Ž1920–1938..
Fig. 2. Nominal and real opium prices in Taiwan, 1897–1942.
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Table 2 Opium revenues and government revenues Year Ž1.
Opium revenues Žin 1000 T$.
Public enterprises Ž2. Žin 1000 T$.
Government revenues Ž3. Žin 1000 T$. Ž1.rŽ3. Ž%.
1900 1910 1920 1930 1940 1944
4234 4674 6719 4349 2278 1218
9692 21,913 51,845 74,986 179,392 299,142
22,269 55,338 119,148 129,757 352,908 844,013
19.01 8.45 5.64 3.35 0.65 0.14
Note: Figures are based on data from the Statistical Summary of Taiwan for the Past 51 years, pp. 982 and 1002. Public enterprises include monopoly bureaus for salt, opium, tobacco, liquor, electricity, mail, and railroad transportation.
The real opium price is calculated using the Taipei wholesale price index Ž1910–1942. as a deflator. 7 From 1910 to 1942, there were fluctuations in the real price but no clear trend. Table 2 shows the revenues from opium sold, from public enterprises, and total government revenues in the colonial period. In 1900, the government relied heavily on opium revenues, and about 20% of the total budget was derived from opium revenues. The ratio decreased rapidly, falling to only 0.14% of the annual colonial government budget by 1944. Goto had recommended that the revenues from the monopoly should only be used for purposes related to opium suppression, and not be appropriated for general administrative needs. A majority of the opium revenues were allocated toward funding public health and hygiene enterprises to increase public welfare. The revenues were also used in part for educational expenditures in rural areas, including primary school textbooks and teaching programs to educate the younger generation about the detrimental effects of opium smoking. 8 At the same time, the colonial government established a police bureaucracy to enforce the gradual prohibition policy. A large part of the funding for the police and opium bureau administration was allocated from the revenues of opium sales. 7 Taipei is the capital of Taiwan. The consumer price index is not available. The base year for the Taipei wholesale price is 1914. 8 To Ž1935., a medical professor, investigated the records of 2433 opium addicts and found that 56% of them could neither read nor write, 38% knew only Chinese characters, and only 5.6% had entered Japanese elementary school. Overall, literacy and educational levels in Taiwan were higher, which suggests that the habit of opium smoking was negatively related to education level. In his study, Prof. To collected data and studied various aspects of opium use in Taiwan, mainly with changes in the number of opium addicts during 1895–1933; the survey studied the age at which opium smoking started, the motive leading to opium smoking, the degree of addiction, physical conditions of the addicts, their mortality rates, occupation, education, and criminal behavior. To our knowledge, this study is one of the most comprehensive on opium addicts in the literature.
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Fig. 3.
Fig. 3 shows the change in total opium consumption and consumption per user during this period. The quantity of opium sold by the licensed stores decreased from 197,465 kg in 1900 to only 7940 kg in 1942. Although there are no data on illegal use, the declines in quantity sold ŽFig. 3. and in number of registered addicts ŽFig. 1. suggest that the colonial government had successfully reached its original target of effectively eliminating opium consumption in Taiwan within several decades.
3. Empirical models and results Opium is a consumer good with addictive characteristics. Two kinds of approaches, the two-part model and the myopic–rational addiction model, are used to analyze consumption. Initially used to model health-care expenditures ŽManning et al., 1981; Duan et al., 1983; Manning et al., 1995., the two-part model separates one observed random variable, addictive goods consumption Ž C ., into two parts: ‘C ) 0’ and ‘C < C ) 0’. In our case, the first part is described as a decision equation for the binary choice of zero vs. positive consumption of opium. The decision equation can be formulated as a logit equation: Prob Ž C ) 0 . s 1r 1 q exp Ž yx a . where ProbŽ C ) 0. is the probability of positive consumption, x is a vector of independent variables such as price, income, and education, and a is a set of parameters to be estimated. The use of a logit equation rather than a probit
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specification makes it easier to calculate elasticities. The second part is a level equation for describing how much opium an individual consumes if he is an opium user. Because consumption is positive, it is conventional to model the logarithm of consumption: ln Ž C < C ) 0 . s x b q ´ where b is a vector of parameters to be estimated and ´ is an error term which is independent of x but not necessarily normally distributed ŽDuan et al., 1983.. Alternatively, the myopic–rational addiction model focuses on the consumption behavior of an addict. The myopic assumption involves backward-looking behavior, while the rational addiction assumption examines forward-looking behavior. In myopic models, current consumption is a function of current price and a measure of past consumption, but not future consumption and price. Rational addiction models imply that anticipated future prices have an effect on current consumption. Thus, the hypotheses of rationality and addiction can be tested directly. Becker et al. Ž1994. show that under the assumptions of a quadratic utility functional form and constant marginal utility of wealth, the demand function for addictive consumption can be written as: Ct s b 1 q b 2 Cty1 q b 3 Pt q b4 Yt q b5 Ctq1 q ´ t where Ct , Cty1 , Ctq1 denote the individual opium consumption at time t, t y 1, and t q 1; Pt is the real retail price faced by the opium user; Yt is real per capita income on Taiwan in 1937 Taiwanese dollars; and ´ t is the error term. 9 In this demand function, current consumption is expected to be positively related to income Ž b4 ) 0. and negatively related to current price Ž b 3 - 0.. If past consumption reinforces current consumption, it implies a complementary relationship between current and past consumption, and we can then say that such a good is addictive. The larger the value of b 2 , the greater the degree of addiction or reinforcement. Furthermore, if consumption is addictive but consumers behave myopically, future price and consumption have no influence on current consumption and then b5 s 0. Alternatively, if consumption is addictive but consumers behave rationally, then current consumption should be related to future price as well as future consumption. Differences between myopic and rational behavior are highlighted by testing the coefficient of future consumption in the regression. Rational behavior implies that the coefficient on future consumption should not be zero and should have the same positive sign as the coefficient on past consumption. 9 This estimated equation implicitly assumes that the rate of depreciation on the addictive stock is equal to one. See the work of Chaloupka et al. Ž1993. for a more detailed discussion of empirical models considering the non-unitary assumption.
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Data for this study are drawn from two sources. Except for the variable of per capita income, all the variables are taken from the Administrator’s Office of Taiwan Province Ž1946.. The real income data are from the per capita GDP estimation by Wu Ž1991.. Because the most detailed information available pertains to the period 1914–1942, this is used as the sample period for our analysis. The two-part model is intended for individual-level data. Because we have only aggregated data, the dependent variable in the first part is fractional rather than dichotomous and consumption levels in the second part are per capita rather than individual. Under the logit specification, we model the log–odds ratio as a linear function and the probability or fraction as a non-linear function ŽPapke and Wooldridge, 1996.. More specifically, the linear model is: E Ž log Utr Ž 1 y Ut . < x t . s x t a where Ut is the fraction of total opium users in the population in year t. The non-linear model is: E Ž Ut < x t . s G Ž x t a . where G is the logistic function, and the log-likelihood function is given by: L Ž a . s Ut log G Ž x t a . q Ž 1 y Ut . log 1 y G Ž x t a . The results from the two-part model are shown in Table 3. Column Ž1. contains the estimated parameters of the log–odds ratio model for the proportion of opium users in the population from ordinary least square ŽOLS. estimation. The parameter estimates presented in column Ž2. were obtained from the non-linear function using the maximum likelihood ŽML. estimator. Columns Ž3. and Ž4. report parameter estimates of the demand for opium consumption per capita. The two equations were regressed separately on the log scale for opium consumption per user by OLS. As expected, the coefficients of price are negative and statistically significant in all estimates. That is, an increase in price would lead to a decrease in the fraction of opium users in the population and decreased consumption levels. The coefficients of the income variable are negative in both user equations and statistically significant in the ML estimation, but positive and statistically significant in the estimates of the level equation. This suggests that higher income reduces the probability of being addicted but increases consumption among addicts. Our results are consistent with the estimates of van Ours Ž1995., however, other recent literature does not provide a consistent estimate of the income effect for addictive goods. For example, results from Wasserman et al. Ž1991. and Lanoie and Leclair Ž1998. show that the income variable has no statistically significant impact on smoking, but those from Sung et al. Ž1994. show a positive relationship. The coefficients for the fraction of educated people in the population ŽEDU. are statistically significant and negative in the user models. This suggests that the more educated the population, the smaller the fraction of opium users in the
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Table 3 Estimates of opium consumption from the two-part model Dependent variable
logŽUt r1yUt .
Ut
ln Ct
ln Ct
Independent variable
OLS Ž1.
ML Ž2.
OLS Ž3.
OLS Ž4.
0.029 Ž0.184. y0.436 Žy1.790.
y0.913 Žy1.215.
Intercept Pt
y2.578 Žy2.415. y0.684 Žy2.122.
y2.228 Žy5.762. y0.332 Žy2.304.
ln Pt Yt
y0.268 Žy1.748. y0.880)10y3 Žy0.426.
y0.002 Žy3.624.
0.261)10y2 Ž2.565.
ln Yt EDU POLICE DOCTOR R2 F-statistics x2
0.433 Ž2.480. y21.193 Žy8.098. 274.505 Ž1.200. y1700.02 Žy1.609. 0.98 240.85
Conditional elasticities Pt y0.429 ln Pt EDU y1.432 OÕerall elasticities Pt ln Pt
y18.988 Žy37.607. 193.173 Ž2.168. y2094.36 Žy5.473. 0.20 3.55
0.20 3.15
37.44
y0.208
y0.275 y0.268
y1.283
y0.484 y0.598
Note: Asymptotic t statistics are in parentheses. Ut : total opium usersrpopulation; Pt : real opium prices; Yt : real per capita income; EDU: total number of studentsrpopulation; POLICE: total number of policemenrpopulation; DOCTOR: total number of physiciansrpopulation; Ct : total opium consumptionrtotal opium users. The conditional elasticities are directly computed from the parameter estimate of each equation. The overall elasticities are computed from the parameter estimates combining the first and second part models.
population. Similar results are also found for the fraction of physicians in the population ŽDOCTOR., but the effect of enforcement ŽPOLICE. is counterintuitive. Based on the estimated coefficients, we compute several measures of elasticities. The price elasticity for the fraction of opium smokers in the population is estimated as y0.429 and y0.208 in the two models. The estimated elasticities
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with respect to education are y1.432 and y1.283. These results seem to suggest that an educational policy may have been more effective than the price-control program in the period of 1914–1942. On the other hand, the price elasticities of demand for opium consumption, conditional on use, are y0.275 and y0.268. The overall price elasticities are y0.484 and y0.598, which show that the short-run demand elasticity for opium consumption is inelastic. Table 4 presents the parameter estimates of the myopic–rational addiction model. Columns Ž1. and Ž3. contain the parameter estimates obtained from the OLS estimation. However, the OLS estimation may lead to biased and inconsistent estimates because unobserved variables may affect past and future consumption which are treated as exogenous variables. To avoid this problem, the two-stage least-squares Ž2SLS. method was used. We begin with the myopic addiction model first, and then test whether past consumption is a significant predictor of current consumption. The instrumental variables used in the estimation are the one-period lagged values of price and income plus the other explanatory variables. For the rational addiction model, we use two sets of instruments. One set is the same as those used in the myopic addiction model. The second adds one-period future lead values of price and income. The second column of Table 4 contains 2SLS estimates of myopic models of addiction, while the fourth and fifth columns contain 2SLS estimates of the rational model. Based on the Wu–Hausman test, we find that the OLS estimates are inconsistent. The test statistics are significant at the 5% level. Thus, we stress the 2SLS results here. The results show that most coefficients are consistent with prior expectations. The estimated price effects are significantly negative in both the myopic and rational models. The positive and significant coefficient on past consumption is consistent with the hypothesis that opium smoking is an addictive behavior. However, neither of the coefficients on future consumption are positive and statistically significant. Our results are consistent with the hypothesis of myopic addiction and do not support the hypothesis of rational addiction. We find no evidence that users consider the effect of current consumption on future consumption when making decisions. The myopic addiction results are consistent with the findings by van Ours Ž1995.. The coefficient of the lagged consumption variable indicates that there is a difference between short-run and long-run effects. Based on the results obtained from the myopic model, the overall short-run and long-run price elasticities are y0.481 and y1.377. 10 The average long-run elasticity is approximately three times as large as the short-run elasticity. Our results are thus slightly different from the estimates of van Ours Ž1995.. He obtained a short-run elasticity of y0.7
10 The short-run and long-run elasticities are calculated from the formulas: Ž b 3 r b 2 Ž1y f 1 . f 2 .ŽPrC. and Ž b 3 r b 2 Ž1y f 1 .Ž f 2 y1..ŽPrC. where f 1 s Ž1yŽ1y4b 2 b5 .1r 2 .rŽ2 b 2 . and f 2 s Ž1qŽ1y 4b 2 b5 .1r 2 .rŽ2 b 2 .. See the work of Becker et al. Ž1991..
Table 4 Estimates of opium consumption from the myopic–rational addiction model Ct
Ct
Ct
Ct
Ct
Independent variable
OLS Ž1.
2SLS Ž2.
OLS Ž3.
2SLS Ž4.
2SLS Ž5.
Intercept
0.570 Ž2.482. 0.439 Ž2.323. y0.307 Žy1.894. 0.175)10y2 Ž2.288.
0.080 Ž0.232. 0.767 Ž2.898. y0.540 Žy1.873. 0.305)10y2 Ž2.123.
0.472 Ž2.103. 0.397 Ž2.168. y0.209 Žy1.206. 0.141)10y2 Ž1.630. 0.115 Ž1.476. 0.60 7.85
0.582 Ž3.024. 0.476 Ž4.666. y0.453 Žy3.113. 0.278)10y2 Ž4.101. y0.138 Žy1.067. 0.69 19.09 6.06 Ž0.01.
0.637 Ž2.980. 0.388 Ž2.809. y0.472 Žy2.998. 0.283)10y2 Ž3.798. y0.086 Žy0.663. 0.62 9.49 3.80 Ž0.05.
Cty 1 Pt Yt Ctq 1 R2 F-statistics Wu–Hausman test
0.52 8.28
0.55 8.92 6.34 Ž0.17.
Conditional elasticities Short-run Long-run
y0.861 y1.537
y0.271 y1.167
y0.105 y0.174
y0.240 y0.459
y0.250 y0.409
OÕerall elasticities Short-run Long-run
y1.070 y1.746
y0.481 y1.377
y0.315 y0.384
y0.453 y0.672
y0.463 y0.622
807
Notes: Asymptotic t statistics are in parentheses except P-values are reported in the Wu–Hausman test. Columns Ž2., Ž4. and Ž5. give two-stage least squares Ž2SLS. estimates where Cty 1 and Ctq1 are treated as endogenous variables. The instruments in columns Ž2. and Ž4. consist of the one-period lag of price and income plus other explanatory variables in the model. The instruments in column Ž5. consist of the one-period lag and lead of price and income plus other explanatory variables in the model. The conditional elasticities are calculated by using the formula of Becker et al. Ž1994.. The overall elasticities are calculated from the conditional elasticities and the estimates of the two-part model.
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Dependent variable
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and long-run price elasticity of y1.0. For comparison with empirical work on cigarette consumption, Becker et al. Ž1994. estimated a short-run elasticity of y0.4 and a long-run elasticity of y0.75 for smokers using 2SLS estimates; Chaloupka and Saffer Ž1992. estimated a price elasticity of y0.24; Sung et al. Ž1994. estimated short-run and long-run elasticities of y0.40 and y0.48. In an alcohol addiction study, Chaloupka et al. Ž1993. found that the short-run elasticities ranged from y0.13 to y1.46, and long-run elasticities ranged from y0.53 to y2.23. Becker et al. Ž1991. indicated that the ratio of the long-run price elasticity to the short-run price elasticity rises as the degree of addiction increases. Hence, our results indicate that opium smoking was very addictive in Taiwan.
4. Conclusions This paper presents empirical estimates of the demand elasticities for opium in colonial Taiwan, using a two-part statistical model and myopic–rational addiction framework. Demand depends on past consumption, confirming that opium is addictive. Since future consumption has no clear effect on current consumption, we find no evidence in support of the rational addiction model and cannot reject the myopic model. The estimated short-run and long-run elasticities are quite different. The short-run price elasticity of opium consumption is about y0.48 and the long-run price elasticity is about y1.38. Our results confirm the prior conjecture of Becker et al. Ž1991., that the price elasticity of addictive drugs is not small. The opium control program in Taiwan may offer useful lessons for public health programs to control other addictive substances, such as tobacco. The program in Taiwan appears to have successfully reduced the fraction of the Taiwanese population using opium from about 10% in 1895 to nearly zero by 1940. The policy included measures both to reduce the number of new users as well as to help current users to quit. These goals were achieved through a combination of licensing and providing treatment to existing users, refusing to license new users, and increasing the price of opium. Although it is unlikely that any country will adopt such draconian policies to control tobacco use, weaker measures may nevertheless be effective if tobacco is less strongly addictive than opium. The Taiwan experience suggests that the key elements of a tobacco control program include measures to prevent people from beginning to use tobacco and measures to help current users to quit. Enhanced educational efforts and restrictions on sales to young people may help to discourage people from starting to use tobacco. Subsidized treatment programs and measures such as limitations on smoking in public places that make tobacco use inconvenient may help existing users to reduce consumption or quit. Increased tobacco prices should assist with both objectives.
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Acknowledgements The authors thank Shu-jen Yeh and Tsong-Min Wu for providing useful data and acknowledge helpful comments from Jan C. van Ours, Joseph P. Newhouse, V. Kerry Smith, anonymous referees and participants in seminars at National Taiwan University, National Central University and Academia Sinica. All errors in this paper are the responsibility of the authors. This research was supported in part by the Sumitomo Foundation. References Becker, G.S., Murphy, K.M., 1988. A theory of rational addiction. Journal of Political Economy 96, 675–700. Becker, G.S., Grossman, M., Murphy, K.M., 1991. Rational addiction and the effect of price on consumption. American Economic Review Papers and Proceedings 81, 237–241. Becker, G.S., Grossman, M., Murphy, K.M., 1994. An empirical analysis of cigarette addiction. American Economic Review 84, 396–418. Benson, B., Rasmussen, D., 1991. Relationship between illicit drug enforcement policy and property crimes. Contemporary Policy Issues 11, 106–113. Chaloupka, F.J., Saffer, H., 1992. Clean indoor air laws and the demand for cigarettes. Contemporary Policy Issues 10, 72–83. Chaloupka, F.J., Grossman, M., Becker, G.S., Murphy, K.M., 1993, Alcohol addiction: an econometric analysis, Paper presented at the 1993 meetings of the Allied Social Science Associations, Anaheim, CA. Chow, H.-W., 1958, Economic history of Taiwan during the Japanese period, Bank of Taiwan, Taipei, in Chinese. Duan, N., Manning, W., Morris, C., Newhouse, J., 1983. A comparison of alternative models for the demand for medical care. Journal of Business and Economic Statistics 1, 115–126. Eatherly, B., 1974. Drug-law enforcement: should we arrest pushers or users?. Journal of Political Economy 82, 210–214. Erickson, E., 1969. The social costs of the discovery and suppression of the clandestine distribution of heroin. Journal of Political Economy 77, 484–486. Grossman, M., 1999, The economics of substance use and abuse: the role of price, Keynote Address for Taipei International Conference on Health Economics, Institute of Economics, Academia Sinica, Taipei. Grossman, M., Chaloupka, F.J., Brown, C.C., 1996, The demand for cocaine by young adults: a rational addiction approach, Paper presented at the Addiction and Youths session of the International Health Economics Association, Vancouver, Canada. Ho, S.P., 1978. Economic development of Taiwan, 1860–1970, Yale University Press, New Haven. Konrad, K., 1994. Drug policy and federalism. Public Choice 80, 55–68. Lanoie, P., Leclair, P., 1998. Taxation or regulation: looking for a good anti-smoking policy. Economics Letters 58, 85–89. Manning, W., Blumberg, L., Moulton, L., 1995. The demand for alcohol: the differential response to price. Journal of Health Economics 14, 123–148. Manning, W., Morris, C., Newhouse, J., 1981, A two-part model of the demand for medical care: preliminary results from the Health Insurance Study. In: van der Gaag, J., Perlman, M. ŽEds.., Health, Economics, and Health Economics. North-Holland, Amsterdam. McKim, W.A., 1996, Drugs and Behavior: An Introduction to Behavioral Pharmacology. Prentice-Hall, NJ.
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Nisbet, C.T., Vakil, F., 1972. Some estimates of price and expenditure elasticities of demand for marijuana among UCLA students. Review of Economics and Statistics 54, 473–475. van Ours, J.C., 1995. The price elasticity of hard drugs: the case of opium in the Dutch East Indies, 1923–1938. Journal of Political Economy 103, 261–279. Papke, L., Wooldridge, J., 1996. Econometric methods for fractional response variables with an application to 401ŽK. plan participation rates. Journal of Applied Econometrics 11, 619–632. Saffer, H., Chaloupka, F., 1995. The demand for illicit drugs, NBER working paper no. 5238, Cambridge. Silverman, L., Spruill, N., 1977. Urban crime and the price of heroin. Journal of Urban Economics 4, 80–103. Sung, H.-Y., Hu, T.-W., Keeler, T.E., 1994. Cigarette taxation and demand: an empirical model. Contemporary Economic Policy 12, 91–108. The Administrator’s Office of Taiwan Province, 1946. Statistical Summary of Taiwan for the Past 51 Years, Taipei, in Chinese. To, S., 1935. Statistical studies on opium addiction in Formosa, Second Report. Journal of Formosa Medical Association 34, 807–982, in Japanese with English abstract. Wasserman, J., Manning, W., Newhouse, J., Winkler, J., 1991. The effects of excise taxes and regulations on cigarette smoking. Journal of Health Economics 10, 43–46. White, M., Luksetich, W., 1983. Heroin: price elasticity and enforcement strategies. Economic Inquiry 21, 557–564. Wu, T.-M., 1991. An estimation of Taiwan’s gross domestic product: 1910–1950. Taiwan Economic Review 19, 127–175, in Chinese with English abstract.
The price elasticity of opium in Taiwan, 1914–1942 Jin-Long Liu a , Jin-Tan Liu b,) , James K. Hammitt c , Shin-Yi Chou d a
b
National Central UniÕersity, Taiwan National Taiwan UniÕersity and Academia Sinica, Taiwan c HarÕard UniÕersity, USA d Duke UniÕersity, USA
Abstract Between 1895 and 1945, the Japanese colonial government virtually eliminated opium use in Taiwan by licensing and treating existing users, prohibiting sales to others, and raising the price. We evaluate these policies using a two-part model to describe the fraction of the population using opium and consumption among users, and the rational addiction model by Becker et al. Ž1991.. We confirm that opium is addictive and find no evidence supporting the rational addiction hypothesis. Demand is price-elastic with estimated shortand long-run demand elasticities of y0.48 and y1.38. These results have implications for control of other addictive substances. q 1999 Elsevier Science B.V. All rights reserved. JEL classification: D12; I18 Keywords: Opium; Price elasticity; Taiwan
) Corresponding author. Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei Ž100., Taiwan. Tel.: q886-2-2351-9641 ext. 520; fax: q886-2-2321-5704; E-mail: [email protected]
0167-6296r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 6 2 9 6 Ž 9 9 . 0 0 0 2 3 - 5
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1. Introduction A key question concerning demand for addictive drugs lies in assessing the impact of a change in price on quantity demanded ŽGrossman, 1999.. Economists measure such a response as the elasticity of demand for a good. The estimation of a drug’s demand elasticity has long been an important issue in debates about drug legalization policies such as the discussions in the works of Erickson Ž1969., Eatherly Ž1974., Silverman and Spruill Ž1977., White and Luksetich Ž1983., Benson and Rasmussen Ž1991., and Konrad Ž1994.. If demand is highly inelastic, then a total prohibition policy that aims at increasing the price to drug users will have little effect on consumption. Rather, the price increase will result in more spending for the drug, thus increasing the profit to drug suppliers. Due to lack of data, empirical literature on this issue is rare. Most existing studies rely on the use of self-reported drug use data. For example, Nisbet and Vakil Ž1972. used data collected from interviews with college students to estimate the demand for marijuana. The price elasticity of demand ranges from y0.7 to y1.0. Saffer and Chaloupka Ž1995. linked a sample from the National Household Survey of Drug Abuse with data on drug prices from the Drug Enforcement Administration. The estimated participation price elasticity for heroin is about y0.90 to y0.80 and the participation price elasticity for cocaine is about y0.55 to y0.36. Grossman et al. Ž1996. employed the panel survey of high school seniors conducted each year since 1975 by the Institute for Social Research of the University of Michigan. They found that cocaine consumption by young adults is addictive and the model is consistent with the hypothesis of rational addiction. The estimated long-run price elasticity is about y1.5 and 70% larger than the short-run price elasticity. The main problem regarding the use of self-reported drug consumption data is that there is no objective method to examine its accuracy. Consumption may be under-reported because of its social undesirability and illegality. Information about drug prices is also difficult to obtain. Although Becker and Murphy Ž1988. presented a theoretical model of rational addiction, they did not study illegal drugs empirically. Becker et al. Ž1991. suggest that price responses of drug addicts are similar to those of persons addicted to smoking, heavy drinking, and gambling. In a recent paper, van Ours Ž1995. provides the first study on the price elasticity of addictive drugs using the rational addiction model and actual transaction data. Based on opium consumption from the Dutch East Indies, 1923–1938, he found the short-run price elasticities of opium use were about y0.7, and long-run price elasticities were about y1.0. He also estimated that the price elasticity of the annual number of opium users ranged from y0.30 to y0.40. Our paper provides additional empirical evidence on this issue. During the period of Japan’s colonization of Taiwan Ž1895–1945., the Japanese government established an Opium Monopoly Bureau to produce and sell opium to licensed addicts. Those who were diagnosed by physicians as addicts could legally be
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prescribed opium, not only for short-term pain relief, but also to maintain their habit over long periods. 1 In order to discourage opium consumption, the Japanese colonial government adopted several policy instruments such as registering and licensing addicts, setting a high price for the drug, and providing drug education programs. These policy instruments were similar to those adopted in the Dutch East Indies. The Japanese colonial government of Taiwan collected and published detailed annual information concerning opium consumption, revenues, licensing, and registration. Based on this actual transaction information, we apply a two-part model and the framework of Becker et al. Ž1994. to analyze the demand for opium. The empirical models measure total opium consumption for the period 1914–1942. The results indicate that opium consumption is addictive. The overall short-run price elasticity is about y0.48. The long-run price elasticity is about y1.38. Our results support the argument that demand for drugs by addicts is elastic. The paper is organized as follows. Section 2 describes the opium policies and consumption in colonial Taiwan. Section 3 uses the two-part and myopic–rational addiction models to analyze the opium demand function and discusses the short-run and long-run price and income elasticities. Section 4 presents conclusions.
2. Opium policies and consumption during the colonial period In 1894, China was involved in a dispute with Japan about Korean sovereignty. This issue precipitated the first Sino–Japanese war, which ended in the defeat of China. In the negotiations that ensued, the Ching dynasty administration of China ceded Taiwan to Japan. For the next 50 years Ž1895–1945., Taiwan was a Japanese colony. Prior to colonization, smoking opium was legal and had been a popular custom. It is estimated that about 10% of the population smoked opium. From 1865 to 1894, opium imports to Taiwan were the largest import by value, accounting for 45–75% of total imports. 2 How to deal with this issue became one of the most difficult tasks given to the governor-general of the new colonial administration. Although opium was strictly prohibited in Japan, the governor was hesitant to impose the same policy on Taiwan.
1
The designation of opium use as a medical problem was known as the British system. Addicts are given prescriptions by physicians to treat their disease. In 1868, the British Parliament passed the Pharmacy Act, which restricted the sale of opium to pharmacist’s shops. This was the first law that brought the use of opium under the control of the medical profession. It is consistent with the belief that addiction is a medical problem and should be handled by physicians ŽMcKim, 1996.. 2 Ho Ž1978., Table 2.3.
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Fig. 1. Number of licensed opium users and quitters in Taiwan, 1900–1942.
In a policy recommendation to the colonial administration, Goto Shimpei, 3 the director of the Health Administration Bureau of Japan and later appointed the head of the Civil Administration Bureau of Taiwan, warned that if strict opium prohibitions were insisted upon for the colony, and if ‘‘those who violated the law were sentenced to death,’’ then ‘‘more than two divisions of Japanese soldiers would be needed to maintain order’’ ŽChow, 1958.. Goto thought it more realistic to eliminate the habit of opium use gradually over several decades. In December 1895, with the support of the Ministry of Internal Affairs and the supervisor of the Military Medical Administration, the governor-general of Taiwan decided to adopt Goto’s recommendation and the Congress of Japan passed the governor-general’s proposal in February 1896. In January 1897, an opium monopoly system was implemented. 4 The colonial government founded the Opium Monopoly Bureau, which had the exclusive right to produce and sell opium in Taiwan. Under this system, opium was designated for medical use. Wholesale and retail opium merchants and opium smoking shops had to apply for a license from the government. Chartered opium
3
Goto Shimpei studied medicine and served as a physician with the Japanese military forces during the first Sino–Japanese war. After the war, he served as public health advisor for the colonial administration in Taiwan. In February of 1898, he was selected by Kodama Gentaro, the fourth governor-general, to head the Civil Administration Bureau in Taiwan, and held this position until 1906. 4 Similar systems were adopted by the British colonial government in Burma and by the Dutch colonial government in Java. See the work of van Ours Ž1995..
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Table 1 Distribution of registered opium smokers by year and age. Note: Data from To Ž1935. Yearrage
Currentrpreviousa
Smokers Male
Female
1920 20–29 30–39 40–49 50–59 60–69 70q
56 2291 3944 15,664 8183 2149
12 359 1928 2369 1546 531
1930 20–29 30–39 40–49 50–59 60–69 70q
1 488 2669 6986 6886 2573
1940 20–29 30–39 40–49 50–59 60–69 70q
0 6 366 1530 3011 2235
a
Male
Female
1 124 595 1361 1138 647
8.71 1.16 1.77 0.44 0.31
10.33 1.66 0.71 0.48 0.42
0 1 97 330 642 445
6.00 0.75 0.57 0.43 0.32
1.00 0.78 0.55 0.47 0.39
Ratio of current smokers to smokers in same age cohort 10 years earlier.
pharmacies were established to engage in the sale of opium. 5 Those who were diagnosed by medical doctors as addicts were given a license by the government so they could purchase opium from chartered pharmacies and could use opium legally. Using opium without a license was strictly prohibited and punished. 6 Registration of legal opium users started in 1900. In September 1900, there were 169,064 registered addicts, representing 6.3% of the population. Other users failed to register because of fear of prosecution. In 1903 and 1908, the government allowed additional addicts to register, but new licenses were difficult to obtain after 1908. The opium ordinance was revised in 1929. Under the new guidelines, the government adopted a more severe policy toward addicts; 3884 were asked to undergo compulsory medical treatment. For this purpose, the government estab5 Licensed merchants numbered 2659 in 1900, 1046 in 1910, 769 in 1920, 517 in 1930, and 303 in 1940. 6 From 1905 to 1942, 34,895 people, more than 900 per year, were prosecuted for illegal opium use.
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lished a central hospital for addicts in Taipei and special wards in hospitals elsewhere on the island. By the end of 1942, the number of addicts had decreased to 3624, or just 0.056% of the population. Fig. 1 shows the total number of opium users and the number of addicts who quit and surrendered their licenses from 1900 to 1942. The number of opium users decreased gradually as users died or quit. The number quitting each year varied in response to medical treatment programs. Table 1 shows the age and sex distribution of licensed users during different periods. Throughout the period, opium smoking was primarily a male habit. The licensing program led to a rapid aging of the opium-using population. Because few new users were registered after the early years, the distribution of opium users became increasingly concentrated in older age groups. By 1920, almost 80% of registered smokers were aged 40 and above, and by 1940, the fraction increased to 95%. Quitters accounted for about one-quarter of the decline in registered users during the first decade of the policy, and a smaller fraction in later years. After 1920, changes in the number of users in each cohort over time are broadly similar to the 10-year survival rates for opium addicts. To discourage consumption, the Opium Monopoly Bureau sold opium at a high price. The amount of monopoly profit was three times higher than that of import duties levied during the Ching administration. Fig. 2 shows the nominal and real opium price in Taiwan dollars per kilogram. The nominal price was increased from 1897 to 1919 and then remained stable for almost two decades Ž1920–1938..
Fig. 2. Nominal and real opium prices in Taiwan, 1897–1942.
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Table 2 Opium revenues and government revenues Year Ž1.
Opium revenues Žin 1000 T$.
Public enterprises Ž2. Žin 1000 T$.
Government revenues Ž3. Žin 1000 T$. Ž1.rŽ3. Ž%.
1900 1910 1920 1930 1940 1944
4234 4674 6719 4349 2278 1218
9692 21,913 51,845 74,986 179,392 299,142
22,269 55,338 119,148 129,757 352,908 844,013
19.01 8.45 5.64 3.35 0.65 0.14
Note: Figures are based on data from the Statistical Summary of Taiwan for the Past 51 years, pp. 982 and 1002. Public enterprises include monopoly bureaus for salt, opium, tobacco, liquor, electricity, mail, and railroad transportation.
The real opium price is calculated using the Taipei wholesale price index Ž1910–1942. as a deflator. 7 From 1910 to 1942, there were fluctuations in the real price but no clear trend. Table 2 shows the revenues from opium sold, from public enterprises, and total government revenues in the colonial period. In 1900, the government relied heavily on opium revenues, and about 20% of the total budget was derived from opium revenues. The ratio decreased rapidly, falling to only 0.14% of the annual colonial government budget by 1944. Goto had recommended that the revenues from the monopoly should only be used for purposes related to opium suppression, and not be appropriated for general administrative needs. A majority of the opium revenues were allocated toward funding public health and hygiene enterprises to increase public welfare. The revenues were also used in part for educational expenditures in rural areas, including primary school textbooks and teaching programs to educate the younger generation about the detrimental effects of opium smoking. 8 At the same time, the colonial government established a police bureaucracy to enforce the gradual prohibition policy. A large part of the funding for the police and opium bureau administration was allocated from the revenues of opium sales. 7 Taipei is the capital of Taiwan. The consumer price index is not available. The base year for the Taipei wholesale price is 1914. 8 To Ž1935., a medical professor, investigated the records of 2433 opium addicts and found that 56% of them could neither read nor write, 38% knew only Chinese characters, and only 5.6% had entered Japanese elementary school. Overall, literacy and educational levels in Taiwan were higher, which suggests that the habit of opium smoking was negatively related to education level. In his study, Prof. To collected data and studied various aspects of opium use in Taiwan, mainly with changes in the number of opium addicts during 1895–1933; the survey studied the age at which opium smoking started, the motive leading to opium smoking, the degree of addiction, physical conditions of the addicts, their mortality rates, occupation, education, and criminal behavior. To our knowledge, this study is one of the most comprehensive on opium addicts in the literature.
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Fig. 3.
Fig. 3 shows the change in total opium consumption and consumption per user during this period. The quantity of opium sold by the licensed stores decreased from 197,465 kg in 1900 to only 7940 kg in 1942. Although there are no data on illegal use, the declines in quantity sold ŽFig. 3. and in number of registered addicts ŽFig. 1. suggest that the colonial government had successfully reached its original target of effectively eliminating opium consumption in Taiwan within several decades.
3. Empirical models and results Opium is a consumer good with addictive characteristics. Two kinds of approaches, the two-part model and the myopic–rational addiction model, are used to analyze consumption. Initially used to model health-care expenditures ŽManning et al., 1981; Duan et al., 1983; Manning et al., 1995., the two-part model separates one observed random variable, addictive goods consumption Ž C ., into two parts: ‘C ) 0’ and ‘C < C ) 0’. In our case, the first part is described as a decision equation for the binary choice of zero vs. positive consumption of opium. The decision equation can be formulated as a logit equation: Prob Ž C ) 0 . s 1r 1 q exp Ž yx a . where ProbŽ C ) 0. is the probability of positive consumption, x is a vector of independent variables such as price, income, and education, and a is a set of parameters to be estimated. The use of a logit equation rather than a probit
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specification makes it easier to calculate elasticities. The second part is a level equation for describing how much opium an individual consumes if he is an opium user. Because consumption is positive, it is conventional to model the logarithm of consumption: ln Ž C < C ) 0 . s x b q ´ where b is a vector of parameters to be estimated and ´ is an error term which is independent of x but not necessarily normally distributed ŽDuan et al., 1983.. Alternatively, the myopic–rational addiction model focuses on the consumption behavior of an addict. The myopic assumption involves backward-looking behavior, while the rational addiction assumption examines forward-looking behavior. In myopic models, current consumption is a function of current price and a measure of past consumption, but not future consumption and price. Rational addiction models imply that anticipated future prices have an effect on current consumption. Thus, the hypotheses of rationality and addiction can be tested directly. Becker et al. Ž1994. show that under the assumptions of a quadratic utility functional form and constant marginal utility of wealth, the demand function for addictive consumption can be written as: Ct s b 1 q b 2 Cty1 q b 3 Pt q b4 Yt q b5 Ctq1 q ´ t where Ct , Cty1 , Ctq1 denote the individual opium consumption at time t, t y 1, and t q 1; Pt is the real retail price faced by the opium user; Yt is real per capita income on Taiwan in 1937 Taiwanese dollars; and ´ t is the error term. 9 In this demand function, current consumption is expected to be positively related to income Ž b4 ) 0. and negatively related to current price Ž b 3 - 0.. If past consumption reinforces current consumption, it implies a complementary relationship between current and past consumption, and we can then say that such a good is addictive. The larger the value of b 2 , the greater the degree of addiction or reinforcement. Furthermore, if consumption is addictive but consumers behave myopically, future price and consumption have no influence on current consumption and then b5 s 0. Alternatively, if consumption is addictive but consumers behave rationally, then current consumption should be related to future price as well as future consumption. Differences between myopic and rational behavior are highlighted by testing the coefficient of future consumption in the regression. Rational behavior implies that the coefficient on future consumption should not be zero and should have the same positive sign as the coefficient on past consumption. 9 This estimated equation implicitly assumes that the rate of depreciation on the addictive stock is equal to one. See the work of Chaloupka et al. Ž1993. for a more detailed discussion of empirical models considering the non-unitary assumption.
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Data for this study are drawn from two sources. Except for the variable of per capita income, all the variables are taken from the Administrator’s Office of Taiwan Province Ž1946.. The real income data are from the per capita GDP estimation by Wu Ž1991.. Because the most detailed information available pertains to the period 1914–1942, this is used as the sample period for our analysis. The two-part model is intended for individual-level data. Because we have only aggregated data, the dependent variable in the first part is fractional rather than dichotomous and consumption levels in the second part are per capita rather than individual. Under the logit specification, we model the log–odds ratio as a linear function and the probability or fraction as a non-linear function ŽPapke and Wooldridge, 1996.. More specifically, the linear model is: E Ž log Utr Ž 1 y Ut . < x t . s x t a where Ut is the fraction of total opium users in the population in year t. The non-linear model is: E Ž Ut < x t . s G Ž x t a . where G is the logistic function, and the log-likelihood function is given by: L Ž a . s Ut log G Ž x t a . q Ž 1 y Ut . log 1 y G Ž x t a . The results from the two-part model are shown in Table 3. Column Ž1. contains the estimated parameters of the log–odds ratio model for the proportion of opium users in the population from ordinary least square ŽOLS. estimation. The parameter estimates presented in column Ž2. were obtained from the non-linear function using the maximum likelihood ŽML. estimator. Columns Ž3. and Ž4. report parameter estimates of the demand for opium consumption per capita. The two equations were regressed separately on the log scale for opium consumption per user by OLS. As expected, the coefficients of price are negative and statistically significant in all estimates. That is, an increase in price would lead to a decrease in the fraction of opium users in the population and decreased consumption levels. The coefficients of the income variable are negative in both user equations and statistically significant in the ML estimation, but positive and statistically significant in the estimates of the level equation. This suggests that higher income reduces the probability of being addicted but increases consumption among addicts. Our results are consistent with the estimates of van Ours Ž1995., however, other recent literature does not provide a consistent estimate of the income effect for addictive goods. For example, results from Wasserman et al. Ž1991. and Lanoie and Leclair Ž1998. show that the income variable has no statistically significant impact on smoking, but those from Sung et al. Ž1994. show a positive relationship. The coefficients for the fraction of educated people in the population ŽEDU. are statistically significant and negative in the user models. This suggests that the more educated the population, the smaller the fraction of opium users in the
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805
Table 3 Estimates of opium consumption from the two-part model Dependent variable
logŽUt r1yUt .
Ut
ln Ct
ln Ct
Independent variable
OLS Ž1.
ML Ž2.
OLS Ž3.
OLS Ž4.
0.029 Ž0.184. y0.436 Žy1.790.
y0.913 Žy1.215.
Intercept Pt
y2.578 Žy2.415. y0.684 Žy2.122.
y2.228 Žy5.762. y0.332 Žy2.304.
ln Pt Yt
y0.268 Žy1.748. y0.880)10y3 Žy0.426.
y0.002 Žy3.624.
0.261)10y2 Ž2.565.
ln Yt EDU POLICE DOCTOR R2 F-statistics x2
0.433 Ž2.480. y21.193 Žy8.098. 274.505 Ž1.200. y1700.02 Žy1.609. 0.98 240.85
Conditional elasticities Pt y0.429 ln Pt EDU y1.432 OÕerall elasticities Pt ln Pt
y18.988 Žy37.607. 193.173 Ž2.168. y2094.36 Žy5.473. 0.20 3.55
0.20 3.15
37.44
y0.208
y0.275 y0.268
y1.283
y0.484 y0.598
Note: Asymptotic t statistics are in parentheses. Ut : total opium usersrpopulation; Pt : real opium prices; Yt : real per capita income; EDU: total number of studentsrpopulation; POLICE: total number of policemenrpopulation; DOCTOR: total number of physiciansrpopulation; Ct : total opium consumptionrtotal opium users. The conditional elasticities are directly computed from the parameter estimate of each equation. The overall elasticities are computed from the parameter estimates combining the first and second part models.
population. Similar results are also found for the fraction of physicians in the population ŽDOCTOR., but the effect of enforcement ŽPOLICE. is counterintuitive. Based on the estimated coefficients, we compute several measures of elasticities. The price elasticity for the fraction of opium smokers in the population is estimated as y0.429 and y0.208 in the two models. The estimated elasticities
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with respect to education are y1.432 and y1.283. These results seem to suggest that an educational policy may have been more effective than the price-control program in the period of 1914–1942. On the other hand, the price elasticities of demand for opium consumption, conditional on use, are y0.275 and y0.268. The overall price elasticities are y0.484 and y0.598, which show that the short-run demand elasticity for opium consumption is inelastic. Table 4 presents the parameter estimates of the myopic–rational addiction model. Columns Ž1. and Ž3. contain the parameter estimates obtained from the OLS estimation. However, the OLS estimation may lead to biased and inconsistent estimates because unobserved variables may affect past and future consumption which are treated as exogenous variables. To avoid this problem, the two-stage least-squares Ž2SLS. method was used. We begin with the myopic addiction model first, and then test whether past consumption is a significant predictor of current consumption. The instrumental variables used in the estimation are the one-period lagged values of price and income plus the other explanatory variables. For the rational addiction model, we use two sets of instruments. One set is the same as those used in the myopic addiction model. The second adds one-period future lead values of price and income. The second column of Table 4 contains 2SLS estimates of myopic models of addiction, while the fourth and fifth columns contain 2SLS estimates of the rational model. Based on the Wu–Hausman test, we find that the OLS estimates are inconsistent. The test statistics are significant at the 5% level. Thus, we stress the 2SLS results here. The results show that most coefficients are consistent with prior expectations. The estimated price effects are significantly negative in both the myopic and rational models. The positive and significant coefficient on past consumption is consistent with the hypothesis that opium smoking is an addictive behavior. However, neither of the coefficients on future consumption are positive and statistically significant. Our results are consistent with the hypothesis of myopic addiction and do not support the hypothesis of rational addiction. We find no evidence that users consider the effect of current consumption on future consumption when making decisions. The myopic addiction results are consistent with the findings by van Ours Ž1995.. The coefficient of the lagged consumption variable indicates that there is a difference between short-run and long-run effects. Based on the results obtained from the myopic model, the overall short-run and long-run price elasticities are y0.481 and y1.377. 10 The average long-run elasticity is approximately three times as large as the short-run elasticity. Our results are thus slightly different from the estimates of van Ours Ž1995.. He obtained a short-run elasticity of y0.7
10 The short-run and long-run elasticities are calculated from the formulas: Ž b 3 r b 2 Ž1y f 1 . f 2 .ŽPrC. and Ž b 3 r b 2 Ž1y f 1 .Ž f 2 y1..ŽPrC. where f 1 s Ž1yŽ1y4b 2 b5 .1r 2 .rŽ2 b 2 . and f 2 s Ž1qŽ1y 4b 2 b5 .1r 2 .rŽ2 b 2 .. See the work of Becker et al. Ž1991..
Table 4 Estimates of opium consumption from the myopic–rational addiction model Ct
Ct
Ct
Ct
Ct
Independent variable
OLS Ž1.
2SLS Ž2.
OLS Ž3.
2SLS Ž4.
2SLS Ž5.
Intercept
0.570 Ž2.482. 0.439 Ž2.323. y0.307 Žy1.894. 0.175)10y2 Ž2.288.
0.080 Ž0.232. 0.767 Ž2.898. y0.540 Žy1.873. 0.305)10y2 Ž2.123.
0.472 Ž2.103. 0.397 Ž2.168. y0.209 Žy1.206. 0.141)10y2 Ž1.630. 0.115 Ž1.476. 0.60 7.85
0.582 Ž3.024. 0.476 Ž4.666. y0.453 Žy3.113. 0.278)10y2 Ž4.101. y0.138 Žy1.067. 0.69 19.09 6.06 Ž0.01.
0.637 Ž2.980. 0.388 Ž2.809. y0.472 Žy2.998. 0.283)10y2 Ž3.798. y0.086 Žy0.663. 0.62 9.49 3.80 Ž0.05.
Cty 1 Pt Yt Ctq 1 R2 F-statistics Wu–Hausman test
0.52 8.28
0.55 8.92 6.34 Ž0.17.
Conditional elasticities Short-run Long-run
y0.861 y1.537
y0.271 y1.167
y0.105 y0.174
y0.240 y0.459
y0.250 y0.409
OÕerall elasticities Short-run Long-run
y1.070 y1.746
y0.481 y1.377
y0.315 y0.384
y0.453 y0.672
y0.463 y0.622
807
Notes: Asymptotic t statistics are in parentheses except P-values are reported in the Wu–Hausman test. Columns Ž2., Ž4. and Ž5. give two-stage least squares Ž2SLS. estimates where Cty 1 and Ctq1 are treated as endogenous variables. The instruments in columns Ž2. and Ž4. consist of the one-period lag of price and income plus other explanatory variables in the model. The instruments in column Ž5. consist of the one-period lag and lead of price and income plus other explanatory variables in the model. The conditional elasticities are calculated by using the formula of Becker et al. Ž1994.. The overall elasticities are calculated from the conditional elasticities and the estimates of the two-part model.
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Dependent variable
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and long-run price elasticity of y1.0. For comparison with empirical work on cigarette consumption, Becker et al. Ž1994. estimated a short-run elasticity of y0.4 and a long-run elasticity of y0.75 for smokers using 2SLS estimates; Chaloupka and Saffer Ž1992. estimated a price elasticity of y0.24; Sung et al. Ž1994. estimated short-run and long-run elasticities of y0.40 and y0.48. In an alcohol addiction study, Chaloupka et al. Ž1993. found that the short-run elasticities ranged from y0.13 to y1.46, and long-run elasticities ranged from y0.53 to y2.23. Becker et al. Ž1991. indicated that the ratio of the long-run price elasticity to the short-run price elasticity rises as the degree of addiction increases. Hence, our results indicate that opium smoking was very addictive in Taiwan.
4. Conclusions This paper presents empirical estimates of the demand elasticities for opium in colonial Taiwan, using a two-part statistical model and myopic–rational addiction framework. Demand depends on past consumption, confirming that opium is addictive. Since future consumption has no clear effect on current consumption, we find no evidence in support of the rational addiction model and cannot reject the myopic model. The estimated short-run and long-run elasticities are quite different. The short-run price elasticity of opium consumption is about y0.48 and the long-run price elasticity is about y1.38. Our results confirm the prior conjecture of Becker et al. Ž1991., that the price elasticity of addictive drugs is not small. The opium control program in Taiwan may offer useful lessons for public health programs to control other addictive substances, such as tobacco. The program in Taiwan appears to have successfully reduced the fraction of the Taiwanese population using opium from about 10% in 1895 to nearly zero by 1940. The policy included measures both to reduce the number of new users as well as to help current users to quit. These goals were achieved through a combination of licensing and providing treatment to existing users, refusing to license new users, and increasing the price of opium. Although it is unlikely that any country will adopt such draconian policies to control tobacco use, weaker measures may nevertheless be effective if tobacco is less strongly addictive than opium. The Taiwan experience suggests that the key elements of a tobacco control program include measures to prevent people from beginning to use tobacco and measures to help current users to quit. Enhanced educational efforts and restrictions on sales to young people may help to discourage people from starting to use tobacco. Subsidized treatment programs and measures such as limitations on smoking in public places that make tobacco use inconvenient may help existing users to reduce consumption or quit. Increased tobacco prices should assist with both objectives.
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