The World Bank's Tobacco Economics: Very Creative Welfare Economics Is Being Used to Justify Government Intervention. (Health & Medicine)

By Lemieux, Pierre | Regulation, Fall 2001 | Go to article overview

The World Bank's Tobacco Economics: Very Creative Welfare Economics Is Being Used to Justify Government Intervention. (Health & Medicine)


Lemieux, Pierre, Regulation


ECONOMISTS HAVE ARGUED FOR TWO decades that smokers do not incur larger health care costs than non-smokers. That is because non-smokers, statistically, live longer than smokers and reach ages in which they incur large health care costs. What is more, smokers pay heavy tobacco taxes and draw less from public pensions than non-smokers. So, if we look at transfers between groups, smokers subsidize non-smokers, not the other way around.

But simple transfers within society cancel out each other: What one group looses, another one gains. The real issue, from an economic point of view, is whether production and consumption of tobacco leaves us with net social benefits or net social costs.

There is an economic presumption that a good freely produced and consumed on the market produces a net social benefit. Using creative economic analysis, World Bank researchers have attempted to show that this is not true for tobacco -- that an optimal world is a world with no smoking. Although much better grounded in economic methodology than the previous public health literature, their efforts use creative welfare economics to bring us back to the old public health conclusion that the optimal consumption of tobacco is zero.

WORLD BANK STUDIES OF TOBACCO

The World Bank's efforts to establish a net social cost of tobacco using welfare economics began about a decade ago. Welfare economics is the field of economic theory that is concerned with evaluating social benefits and social costs. More recently, the Bank has expended considerable resources on more extended welfare analyses involving some reputed economists. As we shall see, the analyses are still based on naive hypotheses about markets and political processes.

Barnum's numbers In the early 1990s, a World Bank economist named Howard Barnum began publishing a series of articles on the benefits and costs of tobacco. Barnum argued that the benefits of tobacco--the sum of consumer surplus (the value that consumers receive over and above what they pay for tobacco) and producer surpluses (the profits producers earn over and above the minimum remuneration to factors of production)--were more than offset by direct and indirect morbidity and mortality costs from tobacco use. The costs were treated like externalities, i.e, costs that have to be deducted from private benefits.

In a 1993 study that was later described in an article in Tobacco Control, Barnum estimated the costs and benefits of a 1,000-ton increase in the world tobacco producing capacity. He then extrapolated his estimate to total tobacco production. His back-of-envelope calculations produced an implicit estimate of some $20 billion per year (in 1990 dollars) for the sum of consumer and producer surpluses in the world.

Barnum argued that the sum should not be thought of as a net social benefit. Because "most smokers start young, become addicted, and then lose much of the power of choice after addiction," he assumed that "only 25 percent of tobacco starts [are] made by well informed consumers." Thus, in Barnum's perspective, some 75 percent of public health care costs and of lost production from smokers' diseases should be treated as external costs. Barnum estimated that the annual total of the two types of external costs were $21 billion and $173 billion, respectively. Deducting those numbers from the $20-billion surplus (and making some adjustments), he got roughly $200 billion a year in net social cost of smoking for the whole world.

Barnum's estimates imply not only that reducing tobacco production and consumption would increase social welfare, but also that the optimal consumption of tobacco is zero. That is because, given his estimates, any use of tobacco generates direct and indirect costs many times greater than the sum of the corresponding consumer and producer surpluses. Thus, a total worldwide ban on tobacco would increase social welfare, provided that enforcement costs were not too high. …

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