Friday, February 5, 2010

Smoking bans versus tobacco taxation

It is now pretty well established that second hand smoke is bad. How do you handle it though? Apparently, the solution is to ban smoking from public places, in the hope non-smokers will not be affected. Now, are bans truly effective? The economist would respond that ban are generally not the solution to a problem of externalities, and that using taxes or subsidies is a much more effective way to address this problem.

Jérôme Adda and Francesca Cornaglia come to exactly this answer as well. They notice that bans are even worse than you think, because smokers smoke as much as before, but more in a private setting, thus exposing more the more vulnerable ones, children. How can you try to reach smokers in their private setting? Not by a ban, which is unenforceable. But by increasing the tax on tobacco products, one can achieve this, even if this means increasing the tax massively. But given that the tax-elasticity of passive smoking is larger than for active smoking, the tax increase need not be as large as you think. And besides, smokers are actually in favor of tax increases, as they see it as a commitment device to quit (Jonathan Gruber and Botond Kószegi).

9 comments:

Agent Continuum said...

Is the utility-maximization model in this setup overkill? Does it contribute to the results in a meaningful way?

It seems to me, and maybe I'm wrong, that having a max problem in there does not capture the g.e. interactions, if any, nor does it improve on the basic logic that comes from assuming a downwards sloping demand curve with reasonable elasticity in the relevant range.

Min said...

"But given that the tax-elasticity of passive smoking is larger than for active smoking, the tax increase need not be as large as you think."

You went a little fast for me there. It sounds like you are saying that a tax will differentially affect the behavior of the smoker in regard to smoking in the presence of non-smokers vs. smoking alone or in the presence of other smokers. How does that work? Thanks. :)

John said...

Just stumbled upon this blog.Glad to see there's a place for serious economic discussions on the web.

Vilfredo said...

Min, I guess an increase in taxes affects different types of smokers differently, and more those who live with non-smokers.

Min said...

""But given that the tax-elasticity of passive smoking is larger than for active smoking, the tax increase need not be as large as you think."

Ah! I think I get it now. A tax on smoking in the presence of non-smokers will have more of an effect on that behavior than the equivalent tax on smoking in general (via a tax on tobacco). Right?

Anonymous said...

Research the amount of tobacco tax revenues that fund state budgets and say with a straight face that it wouldn't take much to make up the loss. State budgets and fiscal conditions would collaspe. States would have to enact massive sale and property taxes increases if tabacco taxes were removed from revenue rolls. Right now, the States want it both ways: they need tobacco tax by increasing that tax by cessation legislation and political marketing. Smokers are picking up the revenue slack that most non-smoking voters would not stand for and elected legislators know it. The States, as well as the federal government, are enacting anti-tobacco legislation like tobacco pimps.

Here in Indiana, for example, sales tax would have to increase from its 6% to 20% to make up the loss of tabacco tax. Property taxes would have to increase by one-third if tobacco taxes disappeared. Most people don't know the amount of money going into their state coffers from tabacco taxes, which is the problem. If they did it would amaze them. Tobacco was America's first cash corp and it will be for sometime to come. Because state governments know reality by tax revenues and legislators know how far they can push the public annd receive positive attention. It hypocritical but reality.

Danny L. McDaniel
Lafayette, Indiana
Life-long non-smoker

Economic Logician said...

OK, I researched. According to the State Budget Authority [pdf], cigarette tax revenue amounted to $154.5 million in January 2010, Total revenue for the state was $6770.9 for the same period. Losing 2,28% of state revenue is not as dramatic as you state it, and has nothing to do with real estate taxes that are levied at the local level.

And all this has nothing to do with the point of the post, so I will not elaborate further.

watsonrodrig said...
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mack said...
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