Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?
Recent tobacco regulations proposed by the Food and Drug Administration have raised a thorny question: how should the cost-benefit analysis accompanying such policies value foregone consumer surplus associated with regulation-induced reductions in smoking? In a model with rational and fully informed consumers, this question is straightforward. There is disagreement, however, about whether consumers are rational and fully informed, and the literature offers little practical guidance about what approach the FDA should use if they are not. In this paper, we outline the history of the FDA’s recent attempts to regulate cigarettes and other tobacco products and how they have valued foregone consumer surplus in cost-benefit analyses. We discuss the evidence on whether consumers are fully informed about the risks of smoking and whether their choices are rational, reviewing the competing arguments made by different authors about these questions. We describe the appropriate approach to welfare analysis under different assumptions about consumer information and rationality. Based on our reading of the theoretical and empirical literatures, we advocate using a behavioral public finance framework borrowed from the literature on environmental regulation. This approach applies standard tools of welfare analysis while allowing consumer behavior to deviate from rationality and full information without requiring specific assumptions about the reason for the deviation. The use of this approach would substantially reduce the confusion currently surrounding welfare analysis of tobacco regulation.
We thank Abigail Friedman and Don Kenkel for helpful comments. We gratefully acknowledge funding for this project from NIH grant number 5R03CA182990 and, for Levy, from NIA grant number K01AG034232. The funders played no role in the study design, analysis, writing, or the decision to submit the article for publication The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Helen G. Levy & Edward C. Norton & Jeffrey A. Smith, 2018. "Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?," American Journal of Health Economics, vol 4(1), pages 1-25. citation courtesy of