The Economics of Smoking

While the tobacco industry is among the most substantial and successful economic enterprises, tobacco consumption kills more people than any other product. Economic analysis of tobacco product markets, particularly for cigarettes, has contributed considerable insight to debates about the industry's importance and appropriate public policy roles in grappling with health consequences of tobacco. The most significant example is the rapidly expanding and increasingly sophisticated body of research on the effects of price increases on cigarette consumption. Because excise tax is a component of price, the resultant literature has been prominent in legislative debates about taxation as a tool to discourage smoking, and has contributed theory and empirical evidence to the growing interest in modeling demand for addictive products. This chapter examines the research and several equity and efficiency concerns accompanying cigarette taxation debates. It includes economic analysis of other tobacco control policies, such as advertising restrictions, prominent in tobacco control debates. Research addressing the validity of tobacco-industry arguments that its contributions to employment, tax revenues, and trade balances are vital to economic health in states and nations is also considered, as it is the industry's principal weapon in the battle against policy measures to reduce tobacco consumption.