17.1 The economic rationale for intervention in the tobacco market

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Economic theory assumes that consumers know what is best for them. This concept is known as 'consumer sovereignty'. Economists posit that the most efficient way of allocating society's scarce resources is to allow individuals to make their own consumption choices (such as whether or not to purchase a particular product) within a free, competitive market. According to this economic framework, if smokers freely and willingly consume tobacco with full information about the health consequences and addictive potential, and if they also bear all the costs and benefits of their choices, then the market could be described as operating efficiently, and there would be little grounds for the government to intervene.5

Economists who argue that the government should intervene to reduce harm caused by tobacco products point to three major market failures: information failure about the health risks of smoking; failures resulting from the addictiveness of smoking; and the external costs of smoking. External costs (also known as social costs or externalities) include all those costs imposed by smoking on people other than smokers themselves, as well as those costs borne by smokers and their families that result from addictive rather than voluntary consumption.

17.1.1 Information failure

Smokers are far from fully informed about health risks posed by tobacco use.

Some consumers cannot name a number of the major diseases caused by smoking. In recent Australian research,6 fewer than half the smokers agreed that smoking causes stomach cancer (44%), and fewer than one-third of smokers accepted that pancreatic cancer (30%), gangrene (28%), kidney cancer (27%), bladder cancer (26%) and cervical cancer (23%) are illnesses caused by smoking. Almost one-fifth (18%) of smokers believe that the dangers of smoking have been exaggerated.6

Even where they are aware of health problems that are caused by smoking, smokers may not fully appreciate the degree of risk or the extent or consequences of disability caused by these conditions.7 They may not know how early in life illness may strike, nor how poor their prognosis may be, nor how severely their life may be affected by the disease and subsequent medical treatment.8 While it is true that virtually all smokers would know that smoking, in general terms, is dangerous to health, many young smokers may be unaware of crucial facts that would make a difference to their assessment of those risks and their decisions about when they will seriously attempt to quit. Many young women who planned eventually to have a family for instance, might be more inclined to quit smoking in their early 20s if they knew that smoking reduces fertility, increases their chance of having a miscarriage and causes infant deaths.[1]

Even when fully informed about the risks of smoking, smokers may hold unrealistic beliefs about the relevance of such information to themselves. 5, 9, 10

17.1.2 Failures resulting from addictiveness of tobacco products

The second failure in the tobacco market centres around the addictiveness of tobacco- delivered nicotine and people's inadequate appreciation of the addictiveness of nicotine before they start using the product.

Most smokers have to make several attempts to quit before they succeed; many never succeed in overcoming their addiction; and many former smokers remain vulnerable to smoking at stressful times.11

Despite it being illegal to sell cigarettes to minors, the vast majority of new smokers show clear signs of nicotine dependence before they reach the age at which they may legally vote, drive or purchase alcohol products. Adolescent nicotine exposure produces both immediate and long-lasting changes in central nor-adrenaline and dopamine systems, with adolescents showing signs of dependence on tobacco-delivered nicotine after very limited exposure.12 Scientists now believe that young brains are even more sensitive to nicotine than the brains of older people, and that young people may be more prone than older people to becoming dependent on tobacco-delivered nicotine.13

There is clear evidence that younger people underestimate the risk of becoming addicted to nicotine. Among secondary-school students in the United States who smoke but believe they will quit within five years, fewer than two out of five actually do quit.14 In high-income English-speaking countries about 90% of current smokers regret ever having starting.15

17.1.3 The external costs of tobacco use

Externalities, or the costs imposed on people who do not freely choose to use tobacco products, are a third crucial aspect of failure in the tobacco market.

Direct physical costs for non-smokers exposed to tobacco smoke5 include both short-term and long-lasting health effects for children born to smoking mothers—see Chapter 3, Section 3.8 — and an increased risk of various diseases in children and adults exposed to second-hand smoke either at home or at work—see Chapter 4 Sections 4.4 , 4.5 , 4.6 and 4.7 .

Collins and Lapsley report that deaths in Australia in 2004–05 due to involuntary exposure to tobacco smoke (both through maternal smoking and exposure to second-hand smoke) totalled 149—see Collins and Lapsley 2007, Table 221—such exposure also accounted for 63,667 hospital bed days and total hospital costs of $33.7 million. Ninety percent ($30.6 million) of the attributable hospital costs of involuntary exposure to tobacco smoke were due to illness among children aged under 15.

In Australia, where health care is predominantly publicly funded, financial externalities also include costs of treating smokers who develop one or more of the many diseases caused or exacerbated by smoking. In 2003, smoking was the risk factor responsible for the greatest burden of disease in Australia, accounting for 7.8% of the total burden.16

For a given year the cost of smokers' health care will most certainly exceed that of health care for an equivalent number of non-smokers. However there has been debate as to how health care costs of smokers and non-smokers might differ over their lifetimes given that non-smokers will on average live significantly longer. Recent estimates taking into account the growing number of diseases demonstrated to be attributable to tobacco smoking conclude that—in high-income countries at least—overall lifetime costs for smokers are greater than those of non-smokers.5

And as will be discussed in full in Section 17.3 , treatment of disease is only one of many costs attributable to tobacco use that are borne by individuals, governments, businesses and society as a whole.

17.1.4 Potential government responses to market failure

The extent of failure in the tobacco market justifies vigorous government intervention through strategies such as information, regulation, taxation and subsidies.

In response to incomplete information, governments can provide mass education and social marketing campaigns; they can mandate health warning labels on cigarette packaging and information at point of sale; and they can finance research on how most effectively to frame and deliver health information.5

In response to addiction to tobacco-delivered nicotine among adults, governments can fund the development and delivery of education materials, advisory services and courses; they can allow advertising and sale of clinically proven medicines to treat tobacco dependence and subsidise cost-effective pharmacotherapies available on prescription; and they can provide resources and frame financing conditions to encourage health care providers to make best use of the appropriate therapies and services.5

To prevent addiction among children governments can increase tax levels to make cigarettes less affordable; they can enforce regulation that prohibits sale of tobacco products to minors; they can mandate and fund drug education in schools; they can mandate disclosure—both on products and at point of sale—about the addictive properties of nicotine; and they might also regulate to make cigarettes less attractive and less addictive to children.5

Government responses to direct physical externalities include counselling of expectant and new parents, introduction of smokefree regulations in public places and education programs to discourage smoking around others.5

To reduce future public spending on treatment of diseases caused by smoking, governments could direct health system resources to identifying smokers and treating tobacco dependence, with priority in resource allocation for those smokers at greatest risk of disease.17, 18

To address the total sum of externalities caused by smoking and overall failure in the tobacco market, governments can adopt a comprehensive tobacco control policy including: increases in taxes on tobacco products and implementations to minimise tax avoidance; education and social marketing campaigns; regulations to ensure smokefree workplaces, hospitality venues and public transport; rigorously enforced bans on all forms of promotion of tobacco products and on sales to minors; services to provide support to smokers quitting and subsidies of therapies to treat tobacco dependence; and regulation about the performance and packaging of products and the information that must be provided to consumers on or within the packaging.5 The Framework Convention on Tobacco Control (FCTC)[2], which came into force in 2003, commits all signatories to adopting such a comprehensive program in their countries. The FCTC is described in Chapter 18. The research supporting each aspect of a comprehensive tobacco control program along with a description of progress in implementing such strategies in Australia are described in other chapters of this book.