5 Smoke If You Got ‘Em

Trade-Offsby

Harold Winter

Product X

• X has been around for a long time. – Many people use it. – evidence has been gathered to demonstrate that using X

can increase your chance of being harmed or dying. – if you use X with your loved ones close by, they too face

an increased chance of being harmed or dying. – Is this enough information to lead you to the conclusion

that banning product X may be sound social policy?

Driving and Smoking

• Driving is a dangerous activity.• So is smoking.– So why has smoking been vilified but driving

hasn't?

• But cigarettes have generated a community of hatred against them, unlike any single product legally being sold today.

The Economic Benefits of Smoking

• After Winter discussed some of the benefits of smoking, and how some of the costs of smoking may be exaggerated, alumni commented that he had given them something new and challenging to think about.

• Quite simply, they discovered that economic reasoning does have much to add to the debate on smoking.

No Benefits of Smoking?

• The most important benefit is that smokers enjoy doing it.

• To argue that there are no benefits to an activity that hundreds of millions of people throughout the world undertake daily you are factually incorrect. – This is no longer a debate over the accurate

measurement of the costs and benefits, or over the definition of social welfare.

– You are now, to be polite, unambiguously wrong.

Winter’s Criticism

• Although the authors (Handbook of Health Economics) do not claim that there are no benefits to smoking, they assume that market imperfections are prevalent enough to allow their analysis to focus on the reduction of smoking as their goal.

• Personally, however, I would not relegate the concept of consumer sovereignty to a footnote, and then abruptly dismiss it.

Winter’s Plan• Winter initially assumes that smoking is a rational choice for a

consumer. • Then, he will consider the potential market imperfections,

– misinformed consumers– addiction– cigarette advertising– youth smoking– health costs borne by the state– secondhand smoke.

• He will play devil's advocate throughout this chapter and argue that these so-called market imperfections deserve some serious scrutiny.

An Individual's Decision to Smoke

• An extreme hypothetical example:– An adult male is a heavy smoker, and when he

smokes he does it completely alone.– He has perfect information about the risks of

smoking. – He has privately-purchased health insurance to

cover any medical expenses he may incur because of his smoking. • In the event that he does get ill, he will not be a

financial burden to anyone else, including the state.

Can We Justify a Ban on Smoking?

• It is possible for paternalism to justify a social policy against smoking. – Some believe that it is an acceptable social goal to

protect the individual from himself.

• Some people sincerely feel bad when they observe others harming themselves.

What Do You Know?

• There is evidence to suggest that smokers don't understand the risks, but it may not be in the way most people think.

• Your willingness to pay for the product must outweigh the full price in order for you to realize gains from trade from the purchase of that product. – For the sake of simplicity, let's assume that the

nonmonetary price of a pack of cigarettes just includes the adverse health risk factor.

Underestimating the Risk

• Assume that the dollar price of a pack of cigarettes is $3.50 and that each pack imposes a $1.00 risk factor on the smoker. – If you are a smoker, and you correctly understand

the risk factor, you will only buy the pack if you value it above the full price of $4.50.

– Let's say you underestimate the risk factor, believing it is only $0.50. • Underestimating the risk of smoking can lead to too

much smoking.

Estimating Risk

• If smokers tend to underestimate the risk of smoking, they are likely to be smoking too much. – Underestimation of risk represents a classic

setting of market failure, and provides a justification for social policy intervention.

– What policy is best to reduce the amount of smoking is difficult to determine. • Provide information?• Tax or ban?

Overestimating the Risk

• If smokers tend to overestimate the risk of smoking, the policy implications can be far more subtle. – If smokers overestimate the risk of smoking,

maybe there is little role for any further policy action.

– Some studies show that smokers not only overestimate the risks of smoking, they grossly overestimate the risks of smoking.

The Addictive Choice

• Is there such a thing as rational addiction? – If you are a rational addict, however, you will incorporate

the (higher) future cost into the current consumption and consume fewer cigarettes today. • To the extent that smokers are rational, this presents a

weaker case for social policy intervention.– From a social policy perspective, the justification for

controlling smoking behavior is strongest for nonrational addicts. • Polices that discourage smoking may ultimately improve the

welfare of the smoker.

Preference for Control

• New research on rational addiction suggests the possibility that a smoker may prefer to be controlled. – A rational addict may develop a self-control problem.

• Such tremendous differences in the behavior of smokers make the implications of, and the justifications for, social policy to control smoking much more subtle and complicated.

Advertising

• There are numerous empirical studies on the effect of advertising on the demand for cigarettes. – Many of the studies find little or no effect of

advertising on enhancing the demand for cigarettes.

– If all cigarette advertising is for brand warfare, a total ban on cigarette advertising may be beneficial to the tobacco industry.

Reducing Youthful Smoking

• A minimum age limit for the purchase of tobacco. • Restricting the promotional activities of tobacco

companies, especially with promotions aimed at the youth market.

• Taxation– This effect may be larger for teenagers than for adults.

• Parental control– Prohibiting teenage smoking in the home.