JOHN DUNHAM and MICHAEL L. MARLOW ^*

This article examines the effect of restrictive smoking laws on restaurants, bars, and taverns. Supporters of these laws often argue that they do not harm firms and may even raise profits. Opponents argue that owners cater to customer smoking preferences, and laws mandating specific policies will negatively impact profits. This article provides a framework for examining the distribution of effects that smoking laws exert on businesses, and demonstrates that changes in total sales or tax revenues do not provide a meaningful understanding of the economic implications because smoking laws exert different effects on different firms. The distribution of these effects is examined using data from a nationwide survey of 1,300 restaurant, bar, and tavern owners. While some subsets of firms are predicted to suffer revenue declines, bars are predicted to be more than twice as likely to experience losses as restaurants. An important implication is that the increasing level of governmental restrictions on smoking in the hospitality sector could gradually impact the types of service available to the public. (JEL K2, H0)

Laws restricting smoking in restaurants have been enacted in 32 states. ¹ Supporters argue that these laws do not harm firms and may even raise their profits. Recent studies find that bans on smoking in eating and drinking places have not impacted the profitability of these establishments, suggesting that smoking bans either do not reduce demand or offset sales losses by lowering costs. Opponents of smoking restrictions argue that some owners would find it profitable to allow smoking throughout their establishments, others to forbid all smoking, and still others to accommodate both smokers and nonsmokers by creating separate areas or investing in partitions, smoking patios or rooms, and air filtration systems.

Little economic research has been published on the effects of smoking laws on the profitability of restaurants, bars, and taverns, and almost none has been directed toward the issue of how these laws may exert differential effects on businesses. This article provides a framework for examining how smoking laws impact establishments based on a number of business attributes. Hypotheses regarding the effect of smoking laws are tested using data from a nationwide survey of 1,300 restaurant and bar owners. The empirical evidence indicates that smoking laws exert differential effects on businesses.

While a full examination of the welfare effects of smoking laws must consider all members of society, our literature review focuses on the economic effects of smoking

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