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Economics of Smoking Plan

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Economics of Smoking Plan Plan Economics of Smoking – Why smoking is a problem. – Why should governments intervene? – Economic analysis of smoking. Jérôme Adda – Policy responses. UCL – Taxes, cigarettes and smoking intensity – The effect of taxes and bans on passive smoking Why smoking is a problem Why smoking is a problem Diseases caused by tobacco use: Why does tobacco kill? • Lung cancer • Emphysema, bronchitis, etc • Stroke (bleeding in the brain) • Cig smoke has > 4,000 chemicals, 43 known • Heart attack and heart disease carcinogens/harmful substances (tar, cadmium, • Narrowing and clogging of arteries • Cancers of mouth, throat, larynx, esophagus lead, cyanide, nitrogen oxides, benzo(a)pyrine, • Other cancers – bladder, kidneys, pancreas carbon monoxide, vinyl chloride, acetaldehyde…) • Peptic ulcers (stomach bleeding) • Respiratory infections and compromise (cough, wheezing etc) • Gum disease and tooth loss • Low birth weight and SIDS • Damages tissues throughout the body, clogs • Asthma • Ear infections arteries, causes blood clots/bleeding • Compromised sexual performance Adult Per Capita Cigarette Consumption and Major Why smoking is a problem Smoking-and-Health Events -- United States, 1900-1998 1st Surgeon 5000 General’s Report Are some cigarettes better? Broadcast Ad Ban End of WW II 4000 • No such thing as a safe cigarette Master Fairness Doctrine Settlement Messages on TV Agreement • “light”, “low tar” cigarettes are deceptive – 3000 and Radio Nonsmokers - Manipulation by maker 1st Smoking- Rights Cancer Concern 2000 Movement Marlboro - Compensation by smokers so actual yields not = Begins Friday machine yield 1000 Federal Cigarette Tax Doubles Great Depression 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 Source: USDA; 1986 Surgeon General's Report 1 Smoking Prevalence by Gender and Why smoking is a problem Birth Cohort, US Global Trends in tobacco use Men Women .6 • 1.1 billion smokers, 80% in low- and middle income .4 countries (1 in 3 adults) Smoking % .2 • 1.6 billion by 2025 0 1900 1950 20001900 1950 2000 • 85% of all tobacco used is smoked Calendar Year (cigarettes, bidis, kreteks) 1900−1910 1910−1920 1920−1930 1930−1940 Centers for Disease Control and Prevention ( http://www.cdc.gov/tobacco ) 1940−1950 1950−1980 Source: NHIS Graphs by sex Why smoking is a problem Why smoking is a problem United Kingdom: Current Risks Smoking is increasing in the developing world • On average, among 1000 20-year-olds who Male adult prevalence, 1995 smoke cigarettes regularly: US 28 % (was 61% in 1939) East Asia 61 % – about 1 will die from homicide Europe, Central Asia 57 % – about 6 will die from motor vehicles Latin America, Caribb 40 % – about 250 will be killed by smoking in South Asia 41 % (cigs + bidis) MIDDLE age alone (+ 250 more in OLD age) Sub-Saharan Africa 29 % Why smoking is a problem Tobacco deaths are on the increase in India Burden of Tobacco Deaths Shifting 1.6 World: Annual Tobacco deaths (in millions) 1.4 1.2 2000 2030 1 0.8 Developed 2 ~3 0.6 Developing ~2 ~7 World Total 4 ~10 0.4 0.2 Tobacco deaths (in million) 1 in 2 long-term smokers killed by their addiction 0 1985 1990 1995 2000 2005 2010 2015 2020 1/2 of deaths in middle age (35-69) Year Estimates by WHO 1996, 1999 Estimates by Gupta 1989 Estimates by ICMR 1985 2 Smoking is more common among the less educated Smoking prevalence among men in Road Map Chennai, India, by education levels –Why smoking is a problem 6 4 % 5 8 % 6 0 % –Why should governments 4 2 % intervene? 4 0 % 2 1 % –Economic analysis of smoking 2 0 % Smoking prevalence –Policy responses 0 % Illiterate <6 years 6 -1 2 > 1 2 y e a rs y e ars Le ngth of schooling Source: Gajalakshmi and others, background paper Why should governments intervene? Why should governments intervene? Economic rationale – “market failures” Role of economics : • People do not know the risks of tobacco use Provide empirically based work to guide the (imperfect info) formulation of tobacco control policy • Most smokers start young (not fully rational) • Nicotine is very addictive Particularly regarding: • Tobacco users impose costs on others – second hand smoke harms non-smokers 1. How prices influence the demand for tobacco products; – children and infants need protection - effects of addiction on consumer demand – health care costs (families and government) 2. How taxation affects price – opportunity cost for families 3. Effect of media counter-advertising 4. Introduction of restrictions on smoking in public places The impact of price on the demand for tobacco products Road Map 1. Conventional studies on cigarette demand –Why smoking is a problem –Why should governments intervene? 2. Addiction models –Economic analysis of smoking 1. Imperfectly rational models of addictive behaviour –Policy responses 2. Models of myopic addictive behaviour 3. Models of rational addictive behaviour 3. Behavioural economic analyses 3 Addiction Models and Cigarette Demand Addiction Models and Cigarette Demand First discussion by an economist of the effects of addiction on demand Three basic dimensions of addiction: “Whether a commodity confirms to the law of diminishing or increasing return, the increase in consumption arising from 1. Gradual adaptation (tolerance) a fall in price is gradual; and, further, habits which have once grown up around the use of a commodity while its price is low 2. Irreversibility (withdrawal) are not so quickly abandoned when its price rises again”. 3. Positive effects of habits (reinforcement) (Marshall , Principles of Economics) Addiction Models and Cigarette Demand 1. Models of myopic addictive behaviour Economic Models of Addiction: Behaviour is naïve in the sense that … an individual recognizes the dependence of current addictive consumption decisions 1. Models of myopic addictive behaviour on past consumption, but then ignores the 2. Models of rational addictive behaviour impact of current and past choices on future 3. Imperfectly rational models of addictive consumption decision when making current behaviour choices (Pollak, 1975) • Studied by many (Farrel (1952), Houthakker & Taylor (1966)). 1. Models of myopic addictive behaviour 1. Models of myopic addictive behaviour Example: a 1=1, a 2=1, p=1 • Example: Model with two goods, one of 1 these is addictive: 0.9 0.8 α (c ) α 0.7 1 ,1 t −1 2 U(c , c , c − ) = c c subject to y = pc + c 1 2 ,1 t 1 1 2 1 2 0.6 0.5 α 0.4 (c ) 0.3 * = 1 1 ,1 t −1 c1 y 0.2 α + α Share of Total Outlay 0.1 p 1 (c ,1 t −1 ) 2 0 0 1 2 3 4 5 6 7 8 9 10 Past Consumption 4 1. Models of myopic addictive behaviour 2. Models of rational addictive behaviour Rationality implies that individuals incorporate the Other implications (of more sophisticated interdependence between past, current and future models): consumption into their utility maximization process. - Notion of asymmetric response to price and income as evidence of addiction (e.g …future implications are considered when making Young, 1983) current decisions (high discount rate are not ruled - Smokers respond more to a decrease in out) price than to an increase. 2. Models of rational addictive behaviour 2. Models of rational addictive behaviour Individuals recognize the addictive nature of choices they make but may still make them because the gains from the activity exceeds any …the fact that smokers impose enormous costs cost through future addiction. (Becker and on themselves is irrelevant; only the costs Murphy, 1988) they impose on others provide the rationale for a mandate for government action. Key normative implication : the optimal regulatory role for government related to smoking is solely a function of the societal costs induced by smoking. 2. Models of rational addictive behaviour 2. Rational Addiction Model How do we measure the societal costs associated with smoking? • Three periods. • Program of the agent: …low estimates, but what about: +β + β 2 - Second hand smoke? max(,)ucc01 ucc (,) 12 ucc (,) 23 c1, c 2 , c 3 - Pregnant women? Low birth weight babies = + + y c1 c 2 c 3 - Loss in workplace productivity from smoking 5 2. Rational Addictive Model Optimal Consumption Numerical Example No Addiction Addiction: g=0.5 • Discount factor: β=0.95 1.06 1.4 1.3 1.04 • Utility function: 1.2 1.02 1.1 1 a 1 = +2 + ucc(,) ac cc . gcc 0.98 01 112 11 01 0.9 0.96 0.8 0.7 0.94 1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3 1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3 = =− ≥ Period a11, a 2 0.5, g 0 Period 3. Imperfectly rational models of addictive 3. Criticisms of rational addictive models behaviour Reasons to question whether the assumptions of the rational addiction model apply to smoking decisions: • These models assume stable but inconsistent short-run and long-run preferences. Time inconsistency – individuals are more impatient when evaluating trade-offs between today and tomorrow than when evaluating trade-offs in the future. – far-sighted vs short-sighted personality (Schelling, 1978) Naïve : “I’ll start my diet tomorrow” ; – far-sighted planner vs myopic doer Sophisticated : “I wish I could quit but I can’t” . (Thaler and Shefrin, 1981) Hyperbolic Discounting Hyperbolic Discounting • Time inconsistent behavior. • Program of the agent in period 1: • Future discounted at rate β between period t+s and t+s+1, s>0. +δ β + β 2 • Future discounted at rate δβ <β between period t and t+1. max(,)ucc01 ( ucc (,) 12 ucc (,)) 23 c1, c 2 , c 3 • Choices made in period 1 are not optimal anymore in period 2 or 3. = + + y c1 c 2 c 3 • Program of the agent in period 2: +δβ maxucc (12 , ) ucc ( 23 , ) c2, c 3 = + + y c1 c 2 c 3 6 Numerical Example Numerical
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