Wednesday, 2 June 2010

Internalisation and household effects

Theories of the household typically assume that the household heads make decisions on behalf not only of themselves but also on behalf of other family members. Thus, the husband or wife would take into account his or her own welfare when making the smoking decision as well as the implications that the smoking behavior would have for the well-being of other family members.[11] If individuals do in fact internalize these intrafamily externalities, then they will be already reflected in the individual decisions. Rational individual decisions consequently will imply that household externalities are internalized as well and need not be considered.

11. See Becker (1991). Manning et al. (1991) adopt this assumption as well in their smoking externality analysis.
W. Kip Viscusi, pp. 71-2 in Cigarette Taxation and the Social Consequences of Smoking. Tax Policy and The Economy: 9 (1995).

So I'm not out on a limb...

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