The discussion notes that drug abuse has a moral hazard component related to worker choice of treatment or other deterrent activities, as well as a selection component related to drug testing. It notes that when worker tendencies cannot be observed, treatment or deterrent activities undertaken by a worker create a positive externality for other members of the workforce by raising average productivity levels. Since these benefits are not fully received by the person paying for them, the labor market equilibrium will generally produce undertreatment. In addition, asymmetric information may create a negative externality from drug testing, as workers engage in costly testing to signal to firms that they abstain from drugs. To the extent that these costly signals are acquired without any corresponding increase in total productivity, overtesting may result. These costs and benefits exist only inside the labor market; this analysis omits consideration of social costs and benefits outside the labor market. Overall, the analysis concludes that labor market incentives will generally lead to too little treatment and too much testing. Appended analyses and 24 references (Author abstract modified)