17.3 The economic rationale for intervention in the tobacco market

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 is as operating efficiently, and there is no justification for government intervention.1

This situation does not exist in relation to tobacco; the economic argument for government intervention to reduce harm caused by tobacco products arises from the following three major market failures:

  • Information failure about the health risks of smoking
  • Information failure about the addictiveness of smoking
  • The external costs of smoking, i.e. costs imposed by smokers on others, in particular through the health effects of passive smoking.

These market failures will be discussed in detail in the next three sections. Potential government responses to market failures are then outlined.

17.3.1Information failure about health risks of smoking

Smokers are not fully informed about health risks posed by tobacco use. Although virtually all smokers know, in general terms, that smoking is dangerous to health, and research from the United States suggests that smokers aged 50 to 70 years are not overly optimistic in their perception of health risk,2 there are still major gaps in smokers' understanding of the likely impact of tobacco on their health.

For example, the majority of consumers cannot name the major diseases caused by smoking. In recent Australian research,3 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 believe that the dangers of smoking have been exaggerated.3

Many young smokers are unaware of crucial facts that would make a difference to their assessment of the risks of smoking and their decisions about when they will seriously attempt to quit. 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.4 They often do not know how early in life illness strikes, nor how poor their prognosis may be, nor how severely their life may be affected by the disease and subsequent medical treatment.5

Jha et al. describe two main reasons why smokers tend to be ill informed.1 First, the market has hidden or distorted information, 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. The link between smoking and decreased fertility is a good example of both these reasons. Health warnings on cigarette packages do not make it clear to consumers that smoking could reduce fertility, or that there are potentially fatal risks posed to an infant from maternal smoking. Many young women who plan to have children, for instance, might be more inclined to quit smoking in their early 20s if they knew that smoking not just 'greatly increase the chance of having a baby of low birthweight' as indicated in the pack warnings6 but also reduces their chance of becoming pregnant in the first place. The message on cigarette packs tells consumers that smoking can 'lead to serious complications which could harm your baby', but not that these consequences can extend to having a miscarriage, a still birth or sudden death during infancy. Fewer than one in every two smokers in Australia is aware of the link between smoking and these conditions.3

Even when fully informed about the risks of smoking, smokers often underestimate the personal relevance of such risks, believing they are less at risk than others of suffering the ill effects of smoking.1,7,8

17.3.2Information failure about the addictiveness of smoking

The act of smoking is psychologically addictive; tobacco-delivered nicotine is physically addictive. Smokers typically do not understand the addictiveness of nicotine when they start smoking.1 Although some smokers do manage to quit, most have to make several attempts before they succeed, and the costs of quitting are high.9 Many never succeed in overcoming their addiction and former smokers remain vulnerable to smoking at stressful times.1,10

Although selling cigarettes to children is illegal, most smoking starts at a young age, and clear signs of nicotine dependence often appear quickly. In a study in the United States, almost a quarter of children aged 12 to 13 years had symptoms of nicotine dependence within a month of starting smoking.11 After longer follow-up, more than half the children lost autonomy over their smoking.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.11

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, less than two out of five actually do quit.13 In high-income English-speaking countries about 90% of current smokers regret ever having started.14

17.3.3The external costs of tobacco use

Externalities—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. These costs include both short-term and long-term health effects for children born to smoking mothers—see Chapter 3, Section 3.7— 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 to 4.12.1

Collins and Lapsley estimate 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 2008, Table 22.15 Such exposure also accounted for 63 667 hospital bed days and hospital costs of $33.7 million. Ninety% ($30.6 million) of the hospital costs attributable to involuntary exposure to tobacco smoke were due to illness among children aged younger than 15 years.

Collins and Lapsley's analyses (see Section of the social costs of smoking, also regard the cost of health care for smoking-associated illness suffered by smokers themselves as an external cost, on the basis that smokers are not fully informed, not consistently rational in their choice to smoke, and do not personally bear the total costs of consumption. As discussed in Section, health care is only one of many costs attributable to tobacco use that are borne by governments and businesses, as well as individuals.

17.3.4Potential government responses to market failure

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

In response to incomplete information 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

In response to tobacco-delivered nicotine addiction among adults, 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 prevent addiction among children, governments can increase tobacco taxation to make cigarettes less affordable, regulate to prohibit sale of tobacco products to minors, 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.16

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 product 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.17 The FCTC is described in title="Chapter 18">Chapter 18. Hooper and Agule, in a 2009 review published in the Journal of Medical Ethics, refute arguments that such programs, which interfere in the voluntary transactions of producers and consumers, decrease people's autonomy.18 They argue 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.

Relevant news and research

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1. Jha P, Musgrove P, Chaloupka F and Yurekli A. The economic rationale for intervention in the tobacco market. In: Jha P and Chaloupka F, eds. Tobacco Control Policies in Developing Countries, Oxford: Oxford University Press, 2000. Available from: http://www1.worldbank.org/tobacco/tcdc/153TO174.PDF

2. Khwaja A, Silverman D, Sloan F and Wang Y. Are mature smokers misinformed? Journal of Health Economics. 2009;28(2):385¬–97. Available from: http://www.ncbi.nlm.nih.gov/pubmed/19178971

3. 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: http://www.cancervic.org.au/browse.asp?ContainerID=cbrc_research_paper_series

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5. Weinstein N, Slovic P, Waters E and Gibson G. Public understanding of the illnesses caused by smoking. Nicotine & Tobacco Research. 2004;6(2):349-55.

6. Trade Practices (Consumer Product Information Standards) (Tobacco) Regulations 2004 (Cth) 19 March 1994. Available from: http://scaleplus.law.gov.au/html/pastereg/3/1855/pdf/2004No264.pdf

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8. Weinstein N and Klein W. Resistance of personal risk perceptions to debiasing interventions. Health Psychology. 1995;14(2):132-140.

9. Sloan F and Wang Y. Economic theory and evidence on smoking behavior of adults. Addiction. 2008;103(11):1777–85. Available from: http://www3.interscience.wiley.com/user/accessdenied?ID=121398997&Act=2138&Code=4719&Page=/cgi-bin/fulltext/121398997/HTMLSTART

10. US Department of Health and Human Services. The health benefits of smoking cessation. A report of the Surgeon General. Atlanta, GA: Centers for Disease Control, Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 1990. Available from: http://profiles.nlm.nih.gov/NN/B/B/C/V/_/nnbbcv.pdf

11. DiFranza J, Rigotti N, McNeill A, Ockene J, Savageau J, Cyr D, et al. Initial symptoms of nicotine dependence in adolescents. Tobacco Control. 2000;9(3):313-319. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/9/3/313

12. DiFranza J, Savageau J, Fletcher K, O'Loughlin J, Pbert L, Ockene J, et al. Symptoms of tobacco dependence after brief intermittent use: The development and assessment of nicotine dependence in youth–2 study Archives of Pediatrics & Adolescent Medicine. 2007;161(7):704–10. Available from: http://archpedi.ama-assn.org/cgi/content/full/161/7/704

13. Institute of Medicine. Growing up tobacco free: preventing nicotine addiction in youth and adolescents. Lynch B and Bonnie R, eds. Washington, DC: National Academy Press, 1994. Available from: http://www.nap.edu/catalog/4757.html

14. Fong G, Hammond D, Laux F, Zanna M, Cummings K, Borland R, et al. The near-universal experience of regret among smokers in four countries: Findings from the International Tobacco Control Policy Evaluation Survey. Nicotine & Tobacco Research. 2004;6(3):S341-S351. Available from: http://ntr.oxfordjournals.org/cgi/content/abstract/6/Suppl_3/S341

15. Collins D and Lapsley H. The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/5. P3-2625. Canberra: Department of Health and Ageing, 2008. Available from: http://www.health.gov.au/internet/drugstrategy/publishing.nsf/Content/34F55AF632F67B70CA2573F60005D42B/$File/mono64.pdf

16. VicHealth Centre for Tobacco Control. Tobacco Control: A Blue Chip Investment in Public Health. Melbourne: The Cancer Council Victoria, 2003. Available from: http://vctc.org.au/browse.asp?ContainerID=bluechip

17. World Health Organization. WHO Framework Convention on Tobacco Control. Geneva, Switzerland, 2005.

18. Hooper C and Agule C. Tobacco regulation: autonomy up in smoke? Journal of Medical Ethics. 2009;35(6):365–8. Available from: http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=PubMed&dopt=Citation&list_uids=19482980