17.3 The economic rationale for intervention in the tobacco market

Last updated:  January 2020

Suggested citation: Scollo, MM & Greenhalgh, EM. 17.3 The economic rationale for intervention in the tobacco market. In Greenhalgh, EM, Scollo, MM and Winstanley, MH [editors]. Tobacco in Australia: Facts and issues. Melbourne: Cancer Council Victoria; 2020. Available from:  https://www.tobaccoinaustralia.org.au/chapter-17-economics/17-3-the-economic-rationale-for-intervention-in-the-tobacco-market

Economic theory assumes that consumers know what is best for their own welfare. This concept is known as ‘consumer sovereignty’. Economists posit that the ideal 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. Provided consumers freely and willingly purchase and consume products with full information about the health consequences and other consequences, and provided they also bear all the costs and benefits of their choices, then the market is as operating efficiently, and there is no justification for government intervention.1

The conditions envisaged in this ideological framework are clearly not met in relation to tobacco; the economic argument for government intervention to reduce harm caused by tobacco products arises from the following shortcomings in the operation of the tobacco market:

  • information failure about the health risks of smoking
  • information failure about the addictiveness of smoking
  • the externalities of smoking, i.e. costs imposed by smoking on people other than smokers themselves, in particular through the health effects of passive smoking, and the effects of smoking on health care costs and productivity
  • the internalities of smoking, i.e., costs borne involuntarily by smokers themselves, without full knowledge of the risk of addition and potential for harm.

These elements of market failure will be discussed in detail in the next four sections. Potential government responses to market failure are then outlined.

17.3.1 Information failure about health risks of smoking

Although virtually all smokers have a general understanding that smoking poses health risks, many are still unaware of the breadth and likelihood of diseases caused by smoking or the prognosis for progression of the disease. They also have little idea of the day-to-day reality of what it would be like to suffer from such diseases. Most consumers cannot name the major diseases caused by smoking.  Australian research found that in 2003.‑05,2 only 44% of smokers agreed that smoking causes stomach cancer. The proportions of survey participants who agreed that other diseases were caused by smoking were similarly low: pancreatic cancer (30%), gangrene (28%), kidney cancer (27%), bladder cancer (26%) and cervical cancer (23%). Almost one-fifth (18%) of smokers believed that the dangers of smoking have been exaggerated.2 A more recent study found that in 2017, Australians still had limited awareness of many serious harms of tobacco. When asked if smoking increases a person’s risk of 23 smoking-related conditions, only nine conditions were selected by more than two-thirds of participants. Six cancers were selected by fewer than two-thirds.3 Research in the US found that the perceived risk of smoking declined between 2006 and 2015, both among smokers and non-smokers. Perceived great risk declined from 73.9% to 72.9% among the entire population, and while this decrease appears relatively small, it equates to about three million fewer people perceiving great risk associated with smoking.4

Many young smokers’ understanding of the risks of smoking is inadequate for making informed decisions about taking up and continuing to smoke. Many adolescents perceive light smoking, as well as regular smoking in the shorter-term, to be completely risk-free.5 Even when they are aware of tobacco-associated health risks, smokers may not fully appreciate the degree of risk or the extent or consequences of disability caused by these conditions.6 They often do not know how early in life illness strikes, nor how poor their prognosis may be, nor the severity of the disease and subsequent medical treatment.7 (See also Section 3.34).

Researchers have described several reasons why smokers tend to be ill informed. First, the tobacco industry has a long history of hiding or distorting information about the health risks of smoking (see Section 10.12), and, second, there is usually a long period of time between starting to smoke and the onset of illness. This delay obscures the link between smoking and disease.1 An additional explanation may be that the declining prevalence of smoking has resulted in fewer individuals knowing someone affected by tobacco-related disease, thus decreasing the salience of smoking risks.4 Further, although Australian smokers report limited awareness of many tobacco-related health risks, many of these risks have been identified in the years since the current health warnings on cigarette packs were developed. Awareness in Australia is greater for the limited number of conditions that have been featured on graphic health warnings. Well-designed, expanded and updated health warnings may therefore increases smokers’ awareness and understanding of specific harms3 (See InDepth12A). Also contributing to poor levels of knowledge about tobacco caused disease may be declining investment in public education campaigns (see Section 14.3).

Even when well informed about the risks of smoking at a population level, smokers often underestimate the personal relevance of such risks, believing they are less at risk than others of suffering the ill effects of smoking (known as ‘bulletproof beliefs’).1, 8, 9 Additional beliefs held by smokers that serve to minimise the harms caused by smoking or rationalise the behaviour include being sceptical about the evidence (‘sceptic beliefs’), believing that the benefits of smoking outweigh the risks (‘worth it beliefs’), or normalising the risks of smoking (‘jungle beliefs’)—see Section 7.5.2.

17.3.2 Information failure about the addictiveness of smoking

Smokers typically do not fully understand the addictiveness of nicotine when they start smoking.1 Although selling cigarettes to children is illegal, most smoking starts at a young age, and young people tend to be optimistic about their ability to quit before their smoking becomes problematic.10 Among secondary school students in the US who smoke, but believe they will quit within five years, less than two out of five actually do quit. 11 Many young smokers do not believe that they are addicted,10 although clear signs of nicotine dependence often appear quickly. In a study in the US, almost a quarter of children aged 12 to 13 years had symptoms of nicotine dependence within a month of starting smoking.12 After longer follow-up, more than half the children lost autonomy over their smoking.13 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.12 (See Sections 6.13 and 6.14).

Although most adult smokers acknowledge that smoking is addictive and that they themselves are addicted, some still maintain ambivalence about their own addiction or reject being labelled ‘addicted’, even if they agree smoking is addictive for others.14 In high-income English-speaking countries about 90% of current smokers regret ever having started smoking.15 Findings from Australia, Canada, the UK, and the US showed that the average 40-year-old smoker who started in their teens will have made over 20 failed quit attempts, highlighting the difficulty of successfully maintaining cessation.16 Another study found that for many smokers, it may take 30 or more quit attempts before being successful.17

17.3.3 The external costs of tobacco use

Externalities—the costs imposed on people who do not directly use tobacco products—are a third crucial aspect of failure in the tobacco market. These costs include both short-term and long-term health effects for children whose mothers smoked during pregnancy —see Section 3.7— and an increased risk of various diseases in children and adults exposed to second-hand smoke—see Chapter 4. 1

The Global Burden of Disease study estimated a total of 1,714 deaths and 43,102 years of healthy life lost attributable to exposure to secondhand smoke in Australia—see Section 4.7.1 for further details.

Health care for treatment of smoking-associated illness also impose substantial costs on businesses, governments, and smokers’ families.  As discussed in Section 17.2, health care is only one of many costs attributable to tobacco use that are borne by governments and businesses, as well as individuals. Other costs result from lost productivity, fires caused by discarded cigarettes, and litter resulting from discarded tobacco butts and packaging.18

17.3.4 The internalities of smoking

Smokers bear considerable costs to purchase tobacco products and to cover the costs associated with smoking-related diseases. These costs are not borne freely and voluntarily in instances where smokers do not fully understand the health risks of continuing to smoke, regret having started to smoke or are unable to quit despite wanting to do so.

17.3.5 Potential government responses to market failure

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

To prevent addiction among children, governments can prohibit sale of tobacco products to minors, increase tobacco taxation to make cigarettes less affordable, mandate and fund drug education in schools, mandate disclosure—both on products and at point of sale—about the addictive properties of nicotine, and regulate to make cigarettes less attractive and less addictive to children. 1

Potential government responses to externalities include counselling of expectant and new parents, introduction of smokefree regulations in public places, and education programs to discourage smoking around others.1 To address those externalities that relate to public funding of treatment of smoking-associated diseases, governments could direct health system resources to identifying smokers and treating tobacco dependence, prioritising resources for smokers at greatest risk of disease.19

In order to increase knowledge about the adverse health effects of smoking, governments can provide 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 to effectively frame and deliver health information.1

To assist smokers to quit, governments can fund the development and delivery of education materials, advisory services and courses. They can allow advertising and sale of medicines to treat tobacco dependence, subsidise cost-effective smoking cessation pharmacotherapies and provide resources and subsidies to encourage optimal use of the available smoking cessation strategies and services.1

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: tax increases on tobacco products and implementation of strategies to minimise tax avoidance; education and social marketing campaigns; regulations to ensure smokefree workplaces, hospitality venues and public transport; bans on all forms of promotion of tobacco products and on sales to minors; smoking cessation services and subsidies for pharmacotherapies; and regulation of products and packaging.1

The World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), which came into force in 2003, commits all signatories to adopting such a comprehensive program in their countries.20 The FCTC is described in Chapter 19. A 2009 review published in the Journal of Medical Ethics refutes arguments that such programs, which interfere in the voluntary transactions of producers and consumers, decrease people’s autonomy.21 It argues that regulation ensures that only competent, rational, informed adults become smokers and therefore ‘critical autonomy’ is preserved. The research supporting each aspect of a comprehensive tobacco control program along with a description of progress in implementing such strategies in Australia is described in other chapters of this publication.


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2. Brennan E and Durkin S. Perceptions about the health effects of smoking and passive smoking among Victorian adults, 2003-2005. CBRC research paper series no. 25. Melbourne, Australia: Centre for Behavioural Research in Cancer, The Cancer Council Victoria, 2007. Available from: https://www.cancervic.org.au/research/behavioural/research-papers/perceptions_health_smoking_05u.html.

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14. Pfeffer D, Wigginton B, Gartner C, and Morphett K. Smokers’ understandings of addiction to nicotine and tobacco: A systematic review and interpretive synthesis of quantitative and qualitative research. Nicotine and Tobacco Research, 2017; 20(9):1038–46. Available from: https://doi.org/10.1093/ntr/ntx186

15. Fong G, Hammond D, Laux F, Zanna M, Cummings K, et al. The near-universal experience of regret among smokers in four countries: Findings from the international tobacco control policy evaluation survey. Nicotine and Tobacco Research, 2004; 6(3):S341–S51. Available from: http://ntr.oxfordjournals.org/cgi/content/abstract/6/Suppl_3/S341

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