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The Externalities of Smoking

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In the past decades, an increasing number of countries have imposed a ban on smoking in public places, including restaurants and bars. Unlike other regulations of cigarettes such as tax or promoting ban, this territorial smoking control sparked heated debates. While some argue that the implementation of this regulation is inefficient and reduce the public welfare (Viscusi, 1994; Tollison and Wagner, 1992; Lambert, 2006), others claim that smokers do impose negative externalities to both non-smokers and themselves (Gravelle and Zimmerman, 1994; Hanson and Logue, 1998).

In this study, by explaining the externalities of smoking, we try to examine the territorial restriction on smoking using some basic economics words.

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We explore and discuss both production externalities and consumption externalities of smoking and apply this analysis of externalities to the policy of ban on smoking in public places. The next part of this paper explains the externalities of smoking. The third part examines the policy of territorial restriction on smoking. In the final part, we conclude and discuss some shortcomings of this study.

Externalities of Smoking

In theory, in a market that with perfect information and no externalities, the market can distribute resources efficiently without any regulation. However, if there exists externality, the market fails to allocate resources efficiently and regulation or policy by government is likely to improve the market’s allocation (Mankiw, 2008). This is what happened in the case of smoking. The act of smoking by smokers creates negative externalities to non-smokers, whose health will be damaged by second hand smoke, and whose clothes and hair become smelly.

Smokers not only impose externalities on others but also impose externalities on themselves. For example, smokers themselves will likely to suffer from health problem. Assuming that there is not any regulation or policy on production and consumption of cigarettes, the market drives the supply and demand for cigarettes to a balance, as Figure 1 shows. In Figure 1, the market equilibrium is where marginal private cost (the cost of an extra unit consumed) is equal to the marginal private benefit (the satisfaction from an extra unit).

However, the market equilibrium quantity QMarket here does not take externalities of smoking into account. The externalities will cause market failure, in which situation the market cannot allocate resource optimally. If we internalise the externalities, the outcome will be different. The externalities can usually be classified into production externalities and consumption externalities. We examine the externalities of smoking in both of the two aspects. The production externalities of smoking are the cost of smoking (supply) while the consumption externalities of smoking are the benefit of smoking (demand).

Negative Production Externalities of Smoking The cost curve in Figure 1 reflects merely the private cost of smoking. However, consumption of cigarettes creates additional external costs. These costs not only include the cost of health problems of both smokers and non-smokers, but also include costs borne by smokers who are not fully aware of the consequences of smoking (Collins and Lapsley, 1997). Therefore the social cost exceeds private cost. The social optimal equilibrium internalises the external costs of smoking. As can be seen from Figure 2, the social cost of smoking exceeds the private cost.

The social cost curve is above the private cost curve and the gap between these two curves are caused by the negative externalities of smoking. This means that the equilibrium quantity, QMarket is not the optimal quantity. The social optimal quantity QOptimum is less than the market equilibrium quantity QMarket. Negative Consumption Externalities of Smoking At the demand side, smokers have a private benefit from smoking, but if taking externalities into account, the act of smoking creates less benefit than the private benefit. Figure 1 does not illustrate these negative consumption externalities of smoking.

Figure 3 shows demand curve in present of negative consumption externalities of smoking: the benefit to society of smoking is less than the benefit to private smokers. In Figure 3, the social demand curve is above the private demand curve because the social demand curve takes into account the consumption externalities of smoking. The gap between the two curves reflects the negative external benefits of smoking. Same as the external costs of smoking in Figure 2, the equilibrium quantity QMarket is not the optimal quantity. The social optimal quantity QOptimum is less than the market equilibrium quantity QMarket.

Externalities of Smoking Combine Figure 2 and Figure 3, we can get the externalities of smoking, which is illustrated by Figure 4. In this figure, both the externalities of smoking in supply and demand have been internalised. The social optimum equilibrium is the intersection of Social Cost Curve and Social Benefit Curve. The Ban on Smoking in Public Places In order to deal with the market failure, policy makers can enact some regulations on smoking such as tax increase on cigarettes, restriction on sales and ban smoking in specific places.

All these regulations on smoking can be classified into two types: price-based policies and non-price-based polices measures, and ban on smoking in public places is a non-price-based polices (Goel and Nelson, 2006). How does the restriction in public places works? As we have discussed above, policy makers can fix the market failure by internalising the external costs or external benefits. Territorial regulation of smoking internalises some externalities of smoking in both of the two processes mentioned in last section.

One the one hand, a ban on smoking in public places can raise the costs of smoking. According to Goel and Nelson (2006), the territorial restriction of smoking by policy makers aims at raising the costs of smoking. Because of the places restriction, smokers have to move outside to have a smoke. Based on this statement, what the policy of ban smoking in public areas tries to do is to internalise the external cost of smoking, which is illustrated in Figure 2. As can be seen from Figure 2, the social cost curve is higher than the private cost curve.

By raising the cost of smokers, this regulation of smoking internalises the external cost of smoking, shifting the supply curve (cost curve) to the left. On the other hand, a ban on smoking in public places has a negative effect on cigarettes demanded. Wasserman et al. (1991), provide some empirical evidence on this claiming that restricting smoking in public places effectively reduces the cigarettes consumed. This effectiveness of the regulation reflects the internalisation of the external benefit in the Figure 3. The social benefit curve is lower than the private benefit curve.

If the consumption of cigarettes decreases due to the regulation, the demand curve (benefit curve) will shift to the left and thus moving the equilibrium closer to the social optimum. Conclusion We discuss and explain the externalities of smoking and one policy that aims to remedy the market failure caused by the externalities. Smoking entails some negative externalities in two aspects. Firstly, smoking has negative production externalities that generate external cost. Secondly, smoking has negative consumption externalities that reduce the private benefit.

The ban on smoking in public places can help to remedy the market failure of externalities in both of the two aspects. Note that, in this paper, we have not take Coase Theorem into account. The Coase Theorem (1960) predicts that if the information is perfect and no bargaining cost between the two parties, private markets will internalise negative externalities. This means that the negative externalities of non-smokers can be internalised without any policies. In reality, we also need to take the social and healthy aspect into consideration, not only in the words of economics.

Cite this The Externalities of Smoking

The Externalities of Smoking. (2017, Mar 22). Retrieved from https://graduateway.com/the-externalities-of-smoking/

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