Economics in Smoking

Controlling Supply and Demand

Economics 202

Section 3011 Wednesday

The economic cost of smokers to society is phenomenal. It includes monetary costs, lost workdays, shortened work lives, and the tremendous health damage to humans on a global scale. Tobacco is among the greatest causes of preventable and premature death in human history. Tobacco is different from many other health challenges. Consumers and form part of the social custom of many societies demand cigarettes. Cigarettes are extensively traded and profitable commodities, whose production and consumption have an impact on the social and economic resources of developed and developing countries alike. The economic aspects of tobacco use are critical to the success of any control.

Many states, and countries world wide, are establishing and maintaining tobacco- control programs to reduce tobacco use. Either the supply or the demand side may control the tobacco epidemic. The demand side is more immediate and effective.

Taxation is a blunt instrument, but very effective for reducing demand. Higher taxes induce some smokers to quit and prevent other individuals from starting. They also reduce the number of ex-smokers who return to cigarettes and reduce the consumption among continuing smokers. A price increase of 10% would reduce smoking by about 4% in high-income countries and by about 8% in low and middle-income countries. (This means about 10 million deaths worldwide to smoking.) The evidence indicates that young people, people on low incomes and those with less education are more responsive to price changes.

Counter –advertising, prominent warning labels, and restrictions on smoking at schools, work sites, and public places are also measures employed by government to reduce demand. Education is a powerful tool. Especially in the low and middle-income countries where the level of full health awareness is low. “Information Shocks”, such as the publication of new evidence on the health consequences of smoking in the US and Britain in the 1960s and 1970s reduced consumption between 4 to 9%, with a cumulative impact between 15 to 30%.

Advertising bans is, at best, a slight impact on consumption. Public health advocates assert that tobacco advertising does increase smoking, but bans have little effect. Philip Morris’s marketing report admits, “…government regulations have become such a threat to the tobacco industry, companies are coming up with creative ways to advertise and appeal to consumers. Some are developing,”smokers lifestyle magalogs” (a combination of magazine and catalog). The also attempt to show cigarettes as “The Forbidden Fruit”and realize full well that if they can get the consumer to try their brand first, they will more than likely stay with them. Phillip Morris continues on,” the main reason buyers are a weak force is because of their strong brand loyalty….. and little substitution….we have the upper hand with economies of scale, experience curve, channels of distribution, and high brand loyalty…”

An intervention to help smokers quit by making it easier for them to obtain nicotine replacement therapy (NRT) and other cessation interventions. In many countries, NRT id difficult to obtain. If NRT was made more widely available, studies suggest that it could help reduce the demand.

Policy makers have several concerns about controlling the demand for tobacco. Some fear that higher tax rates will reduce government revenues. The evidence shows that an increase in tobacco taxes can raise tobacco tax revenues. Another concern is that higher taxes will lead to massive increase in smuggling, keeping cigarette consumption high but reducing government revenues. Smuggling is a serious problem, but even where it is widespread, tax increases bring greater revenues and reduce consumption. So rather than avoiding tax increases and health gains, the most appropriate measure is to crack down on criminal activity. Some fear falling demand will cause permanent job loss. This does not necessarily mean a decline in the total employment level. Money spent on cigarettes would instead be spent on other goods and services generating new jobs. A global decline, however, could result in job losses over time.

Interventions to reduce the demand for tobacco are much more successful than any interventions to reduce its supply. If one supplier is shut down, another one will be there to take its place. Attempts to impose trade restrictions of cigarettes have been unsuccessful and little impact on worldwide consumption. In low-income countries, it may be