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It is (mostly) used as an "oxidizer" in motors and engines, I understand that much. The oxygen "oxidizes" with other chemicals, while the nitrogen returns to the air.

But $\ce{N2O}$ also produces "euphoria" in human beings, works as a mild anesthetic, and causes people to laugh. Why does this happen?

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    $\begingroup$ This appears to be more of a question for SE:Biology $\endgroup$ – John Snow Sep 13 '14 at 1:19
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In contrast to $\ce{O2}$ (or $\ce{CO}$), $\ce{N2O}$ does not bind to hemoglobin and it is not metabolized in the human body. It is taken up through the lungs, gets in the blood and leaves the body the same way being exhaled.

According to a 2004 study by P. Nagele in PNAS (DOI), $\ce{N2O}$ acts as an antagonist for the $N$-methyl-$D$-aspartate (NMDA) receptor. Other infamous antagonists are drugs like ketamine or phencyclidine.

Further information on NDMA receptor antagonists can be found here.

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