The Economics of Smoking

Abstract

3 Concern about the health consequences of smoking predates the "modern era" by nearly four centuries.In 1604, for example, King James I of England lambasted smoking as "a custome lothsome to the eye, hatefull to the Nose, harmefull to the braine, dangerous to the Lungs, and in the blacke stinking fume thereof, neerest resembling the horrible Stigian smoke of the pit that is bottomlesse" (as quoted in Sullum, 1998, p. 18).King James subsequently raised the tax on tobacco by 1000%, deriving significant revenues for his coffers.This illustrates the profound dilemma that has confronted policy decision makers ever since: whatever its health consequences, tobacco has long been truly a "golden leaf" for farmers and politicians alike.Its role in the very earliest commerce between England and the American colonies is legendary, as is its role in contemporary politics (Taylor, 1984;Fritschler and Hoefler, 1996).Economics of Smoking -p. 4 million adults, almost a quarter of the adult population, smoke cigarettes (down from a high of 42% in 1965 (U.S.Department of Health and Human Services, 1989)).Worldwide, tobacco products are used by approximately one billion people.The large numbers of tobacco consumers, combined with their frequent use of tobacco products, account not only for the disease toll of tobacco, but also for the substantial size of the tobacco industry.Important features of the structure and economic importance of the industry are reviewed in section 6 below. 2.The impact of price on the demand for tobacco products Many researchers once viewed cigarette smoking and other addictive behaviors as irrational and therefore not suitable for conventional economic analysis ( Elster, 1979;Winston, 1980; Schelling, 1984b).They believed that the demand for cigarettes (and other addictive substances) did not follow the basic laws of economics, including perhaps the most fundamental law, that embodied in the downward-sloping demand curve.As the nowsubstantial body of economic research demonstrates, however, the demand for cigarettes clearly responds to changes in prices and other factors, as found in applications of both traditional models of demand and more recent studies that explicitly account for the addictive nature of smoking.Conceptually, economists use a relatively broad definition of price that includes not only the monetary price of purchasing a product, but also the time and other costs associated with using the product.Restrictions on smoking in public places and private work sites, for example, impose additional costs on smokers by forcing them outdoors to smoke, raising the time and discomfort associated with smoking, or by imposing fines for smoking in restricted areas.Similarly, limits on youth access to tobacco may raise the time and potential legal costs associated with smoking by minors, while new information on the health consequences of tobacco use can raise the perceived long-term costs of smoking.This section focuses on the effects of monetary price on demand, while section 5 below considers the effects of other aspects of full price.In addition to price, a variety of other factors can affect the demands for cigarettes and other tobacco products, including income, advertising and other promotional activities, and tastes.In the industrialized nations, the relationship between income and cigarette consumption has reversed.Early demand studies (for example, Ippolito, et al., 1979;Fujii, 1980) concluded that cigarette smoking was a normal good, with cigarette consumption rising as income rose.More recent studies, however, have found that cigarettes have become an inferior good, in that the likelihood of smoking declines as income rises (Wasserman, et al., 1991;Townsend et al., 1994).The effects of advertising and promotion on the demand for cigarettes have been the subject of numerous studies; these are reviewed in detail in section 4 below.Finally, nearly all econometric studies of cigarette demand use a variety of factors to control for tastes, including gender, race, education, marital status, employment status, and religiosity.Given the focus of this book on economics, the impact of these socio-demographic determinants of demand will not be reviewed.4 This section begins with a review of conventional studies of the impact of money price on cigarette demand.This is followed by a discussion of economic models of addiction and their applications to cigarette demand.Implications for the effects of price on cigarette demand from the relatively new field of behavioral economics are then reviewed.The section closes with a short consideration of the relatively limited research on the effects of price on the demand for other tobacco products. Conventional studies of cigarette demandNumerous investigators have estimated the effects of price on cigarette demand using conventional models of demand that do not account for the addictive nature of cigarette smoking.Their studies have used diverse econometric