Economics of Smoking

Effects Of Policy Interventions


Cigarettes are one of the most advertised and promoted products in the USA, at least historically, in spite of the fact that government-imposed limits on such advertising also have a long history, beginning with a ban on advertising of cigarettes on television and radio implemented in 1970. The focus here is on effects of cigarette advertising bans and of promotion of smoking cessation products.

Heckman et al. (2008) criticize much past research that infers advertising has a causal influence on smoking initiation. Specifically referring to the Cochrane Review studies, but applying more generally as well, the authors have three specific criticisms. First, the studies do not develop adequate models on which to base the empirical analysis. Second, they do not adequately account for endogeneity of advertising exposure. Third, there may be insufficient variation in advertising exposure to generate statistical differences in responses.

Overall, evidence on the effects of advertising bans is mixed. Advertising restrictions mainly influence the smoking rate through their impact on concentration of the cigarette product market. With fewer sellers, people smoke less. The effects of both limited and comprehensive bans seem to be greater in developing countries than in developed countries.

Another strategy to reduce cigarette consumption is to promote products that reduce smoking behavior. Avery et al. (2007) investigated a policy in which the Food and Drug Administration (FDA) allowed all cessation products to be sold over-the-counter (OTC) immediately. They projected that this policy would increase advertising of smoking cessation products by 80%. In a second simulation, they assessed the effect of offering each product available OTC a year earlier. They found that this change would increase advertising of smoking cessation products by 9%. As the number of competitors in this market increases initially, the effect on advertising is positive. However, the effect of adding competitors diminishes with entry of new sellers and eventually becomes negative.

Smoking Bans

Smoking bans may have desirable intentions in terms of reducing smoking rates and environmental tobacco smoke, but whether or not in fact they do reduce them is an empirical question. The evidence from the literature on the effectiveness of smoking bans is mixed.

Local laws restricting workplace smoking in Ontario, Canada reduced environmental tobacco smoke for blue-collar workers but not for other workers. Smoking bans in Norway have made smokers more considerate of others in areas where smoking is not banned but it has not been established that the smoking bans cause changes in social norms.

Poutvaara and Siemers (2008) theorized about the role of social norms in smoking. If the social norm is that smokers may smoke at will they argued there would be too much smoking – nonsmokers are hesitant to ask smokers not to smoke in their presence even though the disutility of the other person’s smoking exceeds the utility gain from the social interaction. In this type of situation, smoking bans may represent a second-best policy. Others have found that bans reduce smoking among persons who frequent bars and restaurants but not among the population overall.

There is also research on unintended adverse side effects of smoking bans. One such effect may be that people travel further to get to locations where they can both smoke and consume alcoholic beverages, which may increase the prevalence of drunk driving and some evidence supports this view. Another perverse effect may arise in the form of increasing exposure of nonsmoking family members because bans in public places increase smoking at home.

Master Settlement Agreement

The MSA reached between 46 state attorney generals and the four major cigarette manufacturers in November 1998 represents the largest single public intervention in tobacco control in US history (Sloan and Chepke, 2011). The MSA settled numerous lawsuits filed by individual states against cigarette manufacturers, which alleged that the manufactures had promoted smoking, thereby increasing the smoking rates in the USA, which in turn increased medical costs incurred by the states, mainly through Medicaid.

The MSA included an assessment on cigarette companies that resulted in a substantial increase in cigarette price. The price increase and MSA antismoking provisions reduced smoking rates by 13% for persons aged 18–20 and 65 + and by 5% for others. For the first 15 months after MSA implementation, the effect of the MSA is estimated to have reduced prenatal smoking by 2.4%. The MSA appears to have led states to increase the excise tax on cigarettes, presumably because the MSA weakened cigarette manufacturers’ political power in opposing such increases.

Another explanation for the increase in state cigarette excise taxes post-MSA is that publicity immediately before and after the MSA was implemented affected voter preferences about the cigarette companies and issues related to tobacco control policies with the result that voters were more favorable to such policies after the MSA was implemented.

Although the MSA imposed costs and various restrictions on large cigarette manufacturers, it also reduced the uncertainty about outcomes of legal disputes that existed before MSA implementation. The MSA led to a decrease in manufacturers’ cost of capital by at least 2.2%. Overall, the MSA has been a mixed success. Cigarette price increases can be accomplished more efficiently by excise tax increases, which do not involve the high legal expense of litigation. Moreover, the MSA was a ‘cash cow’ for states rather than a source of revenue dedicated to public programs to reduce smoking and improve population health. Of course, there is no guarantee that additional excise tax revenue from cigarettes would not be spent in the same way.

Behavioral Economics Solutions

As indicated in the Section Alternative Frameworks, some aspects of smoking are consistent with predictions of behavioral economics. There is a limited amount of research on policy interventions whose designs reflect insights of behavioral economics. An experimental product (CARES) offers smokers an opportunity to invest in a savings account in which they deposit funds for 6 months. After this, if they pass a urine test for cotinine and nicotine, they are returned the money. Otherwise, the money goes to charity. Although the results suggest that the program was effective in inducing successful quitting, the possibility remains that participants were more motivated to quit. Further, as the authors acknowledge, only a minority of smokers successfully quit.

Volpp et al. (2009) evaluated a randomized controlled trial of a smoking cessation intervention at one firm. 878 employees were randomly assigned to two groups: (1) a group that only received information about benefits of smoking cessation; (2) the other group received this information plus financial incentives to stop smoking. There was an immediate payment of US$100 for completing the education program, US$250 for cessation within 6 months, and another US$400 for abstaining from smoking for an additional 6 months. An insight of behavioral economics is that immediate payments and implementation of self-control devices are important motivators for behavioral change. The latter group had significantly higher rates of smoking cessation than did the control group – 14.7% versus 5% quitting after 9–12 months following enrollment, which was somewhat lower than the quit rate at 6 months.

In spite of the amount of economic research that has been conducted, several controversies remain, including the magnitude of effects of cigarette prices and taxes on smoking initiation and youth smoking more generally and the causal effect of educational attainment on smoking. The theory of rational addiction made an important contribution in showing that smoking and other addictive behaviors may reflect an explicit choice by informed individuals. A body of empirical research supports some of the model’s predictions.

However, the introduction of psychological concepts into economics by behavioral economics has helped explain important stylized facts about smoking decisions that are not well explained by the fully rational framework. Empirical tests of the imperfectly rational and irrational frameworks are still in their infancy. Furthermore, it is one thing to state that people derive utility from such behaviors as smoking; but what really motivates people to smoke in a point in time, given that they know that smoking is very bad for personal health? Certainly virtually everyone knows that smoking is costly in the long run, but many people smoke and continue to smoke.

In the end, what makes smoking interesting to study is not only its relevance to human health, but also that understanding smoking behavior requires us to draw on a variety of disciplines as well as fields within economics.


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