Making Economic Sense of Anti-Smoking Campaigns
On May 20, cigarette packs in Germany will display images of rotten teeth and blackened lungs. Also this month, cigarette manufacturers in the U.K. are likely to have to switch to plain packaging, without brands or imagery. And the top European court has upheld a 2014 European Commission directive that banned flavored cigarettes, mandated that 65 percent of the surface of packs must be covered with health warnings and imposed restrictions on how much nicotine could be ingested via e-cigarettes.
It's clear where all this is going: Following the example of the U.S., Europe is trying to get its citizens to quit smoking, or not to start. It's a moral issue: It could be argued that it's the government's job to stop people from killing themselves or developing diseases that cause suffering and to curb an activity that poses a threat to public health. Yet governments aren't prepared to ban tobacco completely as a dangerous drug, in part because that also is an economic issue.
Regulating rather than banning tobacco is a matter of a fine balance between establishing strong disincentives for smoking, offsetting its cost to society through taxation and discouraging a black market in cigarettes. Any new strictures disturb that balance, but policy makers appear to be groping for a response instead of developing a model that would predict the costs and benefits of making cigarettes less attractive and harder to get.
Depending on how one counts, society gets either a huge net economic benefit or a huge net loss from smoking. According to a 2012 report prepared for the European Union by the UK consulting firm GHK, the total annual cost of smoking to 27 EU countries (excluding Cyprus) is a whopping 550 billion euros ($627 billion). Yet most of that is the 516.7 billion cost of premature mortality from tobacco, which dwarfs the actual treatment cost and the losses from smoking-related absenteeism and long-term disability. In the U.S., where health-care costs are much higher, the Surgeon General estimates the range of annual direct medical expenses at $132.5 billion to $175.9 billion and the losses from premature deaths at $151 billion.
The problem with these calculations is that while the costs of treatment, disability and absenteeism are real and relatively easy to quantify, the costs linked to premature death are a guess. GHK, like most other researchers, borrowed a "willingness to pay" approach from the European Commission: an estimate of how much society would pay to save a person's life for one year. The median of such estimates in Europe is 52,000 euros.
This method makes some sense because tobacco is regulated on behalf of society, which in effect decides how much smokers' lives are worth to the general well-being. Yet there are counterarguments. Smokers are by now well aware of the risks they are taking. They know they are shortening their lives. Their willingness to pay for the extra years, then, is much lower. From a cynically economic point of view, early deaths from smoking could carry a net benefit rather than a net cost, because they reduces the future liabilities of pension and health care systems. Philip Morris commissioned an infamous paper that made this argument 15 years ago.
Keeping the premature deaths out of the equation makes for a cleaner model in which the directly quantifiable costs are offset by sin taxes. It makes the net benefits or costs transparent, if researchers and poilicy makers agree on which costs to include. GHK only added up the treatment expenses and the losses from absenteeism and long-term disability attributable to smoking. The total amount, 33.3 billion euros, is easily covered by cigarette tax revenue. According to Eurostat, in 2012, the 27 EU countries (not including Cyprus) collected 117 billion euros in alcohol and tobacco taxes, about 60 percent of that (70 billion euros) from tobacco.
That balance could change if more indirect costs -- such as those associated with fighting cigarette smuggling or social care (nursing homes and rehabilitation) -- were included in the calculation. GHK reviewed 17 studies that attempted to quantify the cost of smoking and found that on average, the indirect economic costs were estimated to reach 2.7 times the direct medical costs. Using that rule of thumb, the total cost of tobacco use to Europe would be 95 billion euros -- more than the tobacco tax revenue.
The estimates vary widely, and it would make sense for regulators to adopt a unified costing approach. That would help them understand how the suggested regulation -- plain packaging, advertising bans, taking flavored cigarettes out of circulation, and so on -- would change the balance of costs and benefits. What if a proposed measure drove down treatment costs by less than the projected decrease in tax revenue? In that case, in strictly economic terms, the net benefit to society is negative.
The U.S., which started its anti-tobacco campaign earlier than Europe, its already experiencing declining tobacco tax revenue, which the EU has not. It's not clear, though, whether those declines are fully offset by falling medical and economic costs: No one is tracking that on a regular basis. In any case, societies may decide that the non-economic benefits to curbing or eradicating smoking are well worth the additional costs.
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