British Journal of Addiction (1989) 84, 1123-1138 Factors Influencing the Consumption of Alcohol and Tobacco: the use and abuse of economic models CHRISTINE GODFREY Centre for Health Economics, University of York, Heslington, York, YOI 5DD, United Kingdom Summary This paper is concerned with the use of economic models in the debate about the role that tax increases and restrictions on advertising should play in reducing the health problems that arise pom the consumption of alcohol and tobacco. It is argued that properly specified demand models that take account of all the important factors that influence consumption are required, otherwise inadequate modelling may lead to misleading estimates of the effects of policy changes. The ability of economics to deal with goods such as alcohol and tobacco that have addictive characteristics receives special attention. Recent advances in economic theory, estimation techniques and statistical testing are discussed, as is the problem of identifying policy recommendations from empirical results. Introduction In debates about preventive health policies, it is often asked whether there should be controls on advertising or higher taxes on alcohol and tobacco products. Estimates from well specified economic models have a potentially useful role in the evalua- tion of such alternative policies. This paper contains an overview of the use of economic modelling techniques in determining the factors influencing the consumption of addictive commodities and the use of estimates from economic models in policy decisions. Analysing consumer behaviour and levels of demand forms an important part of economics. Purchases of alcohol and tobacco are a significant proportion of consumers' expenditure and have also been subject to special taxes in most countries. Academics and policy makers are, therefore, parti- cularly interested in the responsiveness of consum- ers' spending and tax revenues to price changes. The harmful consequences associated with the consump- tion of alcohol and tobacco and the addictive characteristics of these commodities have received less attention from economists. One of the questions addressed in this paper is the ability of present economic theories to deal with the special nature of these commodities. Emphasis is given in this review to models of alcohol and tobacco consumption, but similar analyses could be made of other goods with addictive and harmful properties such as coffee. For some addictive commodities there are special problems, for example, in obtaining data when investigating the demand for illegal drugs. These issues are considered in Adam Wagstaffs contribu- tion. The process of economic modelling involves a number of stages and problems arising at these different stages can limit the applicability of re- search findings. The first stage involves the specifi- cation of the theoretical model, and the possible difficulty of capturing special features of alcohol and tobacco consumption has already been men- tioned. The second stage is the application of the theoretical model to the available data. Paucity and 1123