An Economic Analysis On The Externality Of Addictive Consumption

Online game industry is one of the most successful industries in China. The report for online game industry 2004, given by IResearch Corp, anticipated that in 2004 the market scale of online game industry was 2.47 billion RMB, in 2009 the figure would be 10.96 billion RMB, and the annual compound growth rate from 2004 to 2009 would be 34.7%. But, reports about the harmfulness of playing online game often come out, and civilians and specialists suggest governmental interference. In fact, the administration has taken some actions, including the anti-addiction system and so on the real name system. But is the interference necessary?Neoclassical economics research tells us that governmental interference is proper only in one situation: for those rational consumers, if their consumption leads externalities, then, the government should interfere into such consuming activities. In this paper, the research, under the assumption that players are rational, that is to say consumers are forward-looking and pursue utility maximization, focuses on the existence of consumption externalities.When it comes to online games, the possible externality comes from peer pressure. Peer pressure means that the popularity of online games will compel an individual to play online games. With the Becker-Murphy's rational addiction theory as a basic model, this paper tries to analyze the effect peer pressure imposing on personal utility under optimal consumption path, and dynamic optimization approach is used to facilitate the analysis. At last, the paper concludes that the externality of online game playing may exist, depending on the nature of online game players: for those who appreciate friends' recognition, the externality is positive; for those who do not appreciate friends' recognition, the externality does not exist.