The Externalities of Smoking

Topics: Externality, Supply and demand, Market failure Pages: 5 (1479 words) Published: March 21, 2011
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. 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...
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