Cigarette taxes

An Otago university study that was sponsored by anti-smoking groups found that cigarette taxes should be increased.  We know that an externality tax is a good thing, however 70% of the price of cigarettes is made of of taxes already.  The question then is, do we need more cigarette taxes to set the social cost of smoking equal to the social benefit, are we at the social optimum, or have we already gone too far.  Where the price is relative to the social optimum is an important question.  If the price of cigarettes is already at or above the socially optimal level, further cigarette taxes will be inefficient.

Now I have no idea where we are in terms of social cost and social benefit.  Ultimately, if the money from cigarette taxes can cover all the additional health expenditure from smoking, then the tax is sufficient.

People know they are killing themselves with cigarettes, so if that is what they want to do we should let them.  The problem is that they negatively influence other peoples health and put a drain on the health system by getting sicker than people who do not smoke.  If the tax on cigarettes already covers all this, then I don’t want them to lift taxes anymore.  The goal of the cigarette tax should be to cover the externalities of smoking, not trying to stop consumption completely.

Now tell me how cigarettes being an addictive good influences this analysis 😉 .  Bonus points for discussing how cigarettes may be complements to other externality creating goods.

  • Robbie

    Research is relatively mixed, and I’m far from an expert in the field, but there are a number of relatively creditable studies that suggest that smokers are a net benefit to the healthcare system, as which they are costly when sick they die earlier and so are less of a cost to society across time.

    The following study suggests that healthcare costs in the US would fall initially, but rise in the long term if all smoking were to cease:

  • Matt Nolan

    I love it, since smokers kill themselves younger, there lifetime health bill will be lower.

    However, as they don’t live as long they also provide less work hours, and so pay less income tax. As a result, even if a smoker had a lower lifetime health care bill, the fact they pay less income tax suggests that some form of cigarette tax could be corrective.

    Of course you could make the argument that most of them die before getting super, implying that the nation gets all there income tax, but then doesn’t have to pay as much for there health or retirement, and the rest of us benefit. I like it 😉 . Maybe I should convince random people on the street to take up smoking.

  • rauparaha

    Are you trying to tempt me here, Matt? The fact that smoking is addictive means that we can increase the smokers’ lifetime welfare by decreasing the amount that they smoke. This result makes sense when you analyse addiction in terms of hyperbolic discounting rather than rational addiction. Luckily — and you probably thought you’d never hear me say this — empirical studies seem to favour a hyperbolic discounting approach. Gruber and Koszegi have done some metrics showing that smokers report higher levels of life satisfaction when they’ve been forced to smoke less.

    Robbie’s probably right about smokers killing themselves off early and raising total welfare; however, I think I might have an ethical problem with a government that aimed to boost welfare by encouraging people to kill themselves early. The counter to that is that smokers WANT to smoke so you’re improving their surplus as well as society’s. I think that the research on time inconsistency I mentioned above suggests that that isn’t the case.

  • Matt Nolan

    I’m not sure if we can go from saying that the lifetime health bill of a smoker is lower, thereby having smokers increases welfare. After all, second-hand smoke and the such is a negative externality, and as a result that part of the consumption decision has to be taken into account when deciding whether allowing smoking is welfare enhancing.

    Ultimately, I think that the group asking for more cigarette taxes seems to be more interested in the goal of stopping smoking, rather than focusing on the true end, which is maximising social welfare.

  • satsumasalad

    Despite having done Econ 101 and 201 at university I have forgotten more economics than I ever learned. But it strikes me that there’s a gap here – there’s an assumption that if a smoker stopped smoking they wouldn’t cost the society more than other non-smokers. But surely an ex-smoker will, for a while at least, do something else damaging – eat more, drink more for example. They could (like me) end up with diabetes instead through overeating. Yes I’ll live longer now, but boy will I cost the economy something by the time I’m done. Has there been any work on what ex-smokers do? I doubt it. It could be that it’s cheaper for society for smokers to keep smoking.

  • If anyone’s interested, I’ve argued a different perspective here: