The Externalities of Smoking

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Introduction
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



References: Coase, R.A., (1960)., ‘The problem of social cost’, Journal of Law and Economics, Vol.3, pp.1-44. Collins, D., and Lapsley, H., (1997) ‘The economics of tobacco policy’ Available at: http://factsheets.globalink.org/en/economics.shtml. Goel, R.K., (2006), 'The Effectiveness of Anti-smoking Legistlation: A Reveiw ', Journal of Economic Surveys, Vol.20 No.3, pp.325-355. Gravelle, J.G. and Zimmerman, D., (1994), 'Cigarette taxes to finance health care reform: an economic analysis ', Congressional Research Service Report, pp.94-214. Hanson, J.D., and Logue, K.D., (1998), 'The Costs of Cigarettes: The Economic Case for Ex Post Incentive-Based Compensation ', Yale Law Journal, Vol.107, pp.1163-1224. Lambert, T.A., (2006), 'The Case Against Smoking Bans ', Missouri Environmental Law and Policy Review, Vol.13. Mankiw, N.G., (2008), Principles of Economics, South-Western College. Tollison, R.D. and Wagner, R.E., (1992), The Economics of Smoking, Norwell, MA.: Kluwer Academic Publishing. Viscusi, W.K., (1994), 'Promoting smokers’ welfare with responsible taxation ', National Tax Journal, Vol.47, pp.547-558. Wasserman, J., Menning, W.G., Newhouse, J.P. and Winkler, J.D., (1991), 'The Effects of Excise Taxes and Regulations on Cigarette Smoking ', Journal of Health Economics, Vol.10, pp.43-64.

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