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Chapter 7 The Economic Rationale for Intervention in the Tobacco Market Prabhat Jha, Phillip Musgrove, Frank J. Chaloupka,and Ayda Yurekli Economic
theory starts with the assumption that a consumer usually
knows what is best for him or herself - the notion of
'consumer sovereignty'. The theory also assumes that
privately-determined consumption choices including the
decision whether to consume a particular product at all
within a free competitive market, will most efficiently
allocate society's scarce resources. Within this framework,
economic theory holds that if smokers consume tobacco with
full information about its health consequences and addictive
potential, and bear all costs and benefits of their choice
themselves, there is no justification, on the grounds of
inefficiency, for governments to interfere. However, in
practice, the market for tobacco is characterized by three
specific 'market failures' - that is, features that result
in economic inefficiencies and that may therefore justify
public intervention. First, there is an 'information
failure' about the health risks of smoking: some consumers
do not know the risks, and, even where consumers are
informed, they may not appreciate the scale of those risks
or apply the knowledge to themselves. Second, there is an
information failure about the addictive potential of
tobacco. Many smokers, and especially adolescents,
under-estimate the risk of becoming addicted and, once
addicted, face very high costs in trying to quit. These two
information failures result in high private costs of death
and disability for smokers. The third market failure is the
external costs of smoking - that is, the cost imposed by
smokers on other. External costs are more clearly apparent
as the health effects of passive smoking. There are several
ways that governments may intervene. In economic theory,
'first-best' interventions, which specifically address the
identified inefficiency, should ideally be pursued. In the
tobacco market, the first-best intervention would probably
be to educate young people about the risks of addiction and
disease from smoking, or to restrict their access to
tobacco. However, evidence suggests that these measures are
largely ineffective. In contrast, taxation, albeit a blunt
instrument and thus a 'second-best intervention', is highly
effective at protecting children from taking up smoking.
Taxation is also an effective means of correcting external
health costs, and possibly, also external financial costs.
However, taxation and various other interventions impose
costs on a wide range of smokers. The policy options
available to governments are discussed.
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