Negative externalities:

smoking
By Daniil Goldin
for
Eco 101 c
(Prof. Kalchev)

Some basic statistics:

Tobacco is grown in >100 countries, mostly developing ones
China is the worlds largest producer, followed by USA, India, Brazil and
Turkey. These 5 countries produce 2/3 of global output
Russia cigarette consumption:
o 2786 cigarettes a year (per person)
o Smoking is highest among those aged 14-18:
47,9% of men and women in this age group smoke
o Smoke starting age is extremely low: 11-14 yrs.
o Every year about 400.000 smokers die as a result
of their habit
o The government earn about $ 5 billion a year
in revenue from tobacco duty and VAT

The private and social costs of smoking

smoking creates a difference between private and social costs and

benefits
Cigarette consumers derive a private benefit from smoking and their habit
entails a private cost
But the act of consumption creates negative externalities so that the social
cost exceeds the private cost. It is unlikely that smokers do consider the
external costs theyre creating while lighting up.
Smokers may also suffer from information failure- so that theyre not fully
aware of the long term damage created by their habit (i.e over-estimating
the private benefit they get)
If smokers fail to consider the externalities they generate, then market
failure will occur- leading to a loss of social welfare
Many of these externalities are impossible to value accurately in monetary
terms because on the impact on human life

The market failure

Consumption of cigarettes produces external costs
Therefore the social costs exceeds private costs
Private optimum is where marginal private cost (the cost of an additional
unit consumed) equates with the marginal private benefit (the satisfaction
from an extra unit)
Social optimum takes into account the social cost
Without intervention, the self-interest of the smokers will lead to
cigarettes being over- consumed and under-priced by the market
Without a market for pollution smokers can continue to pollute without
penalty

Illustrating market failure

Private costs of smoking

Consumption:

A 20-a day smoker spends about $ 1700 a year on cigarettes. People with low income
eventually spend more than the wealthier ones
Cigarettes are products with a negative income elasticity on demand (i.e an increase in
income will lead to a fall in the demand and may lead to changes to more luxurious
substitutes.)

Health costs:

About half of regular smokers will be eventually killed by their habit- e.g. through lung
cancer, chronic obstructive lung disease and coronary heart disease

Increased health Insurance costs:

Premiums are higher for smokers

The external costs:

Costs to the NHS of treating smoking- related diseases
Smoking itself is regarded as a major source of health inequalities
Lost output/ productivity from working days lost and absenteeism caused
by smoking- related diseases
Increased pressure on the welfare state/ benefits system to finance those
unable to work because of long term illness plus the benefits paid to
dependents of those who die young
Costs created by household fires linked to smoking
Cigarettes are major source of street litter
Cleaning and building maintenance costs

Taxation of cigarettes:
Over 80% of the final retail price is tax (VAT and excise duty)
The aim of higher taxation is to in crease the real cost of purchasing and
consuming cigarettes
Higher prices should control demand by reducing the real incomes of
smokers and increasing an opportunity cost of continuing to smoke
Lower consumption rates reduces output towards the social optimumreducing the extent of market failure
Taxation is also justified on the grounds of making the polluter pay for
the external costs that are created
Extra revenue fro taxation can be used to fund improvements I health
care
The revenue from taxes could be allocated to promote alternatives to
tobacco growing and manufacturing

Health awareness might reduce demand

THANK YOU
FOR WATCHING!!!