Economic Commentary: This North West council is considering paying residents to quit smoking
Submitted for IB HL Economics Coursework (economic analysis of a contemporary article using a key syllabus concept; microeconomics), 800 words
Background
Article: This North West council is considering paying residents to quit smoking, 3th June 2022 (archive)
Date the commentary was written: 21st February 2023
Unit of the syllabus to which the article relates: Microeconomics
Key concept being used: Intervention.
Commentary
Although the free market is generally considered the most efficient mechanism of organising economic activity, it can often fail; in these instances, there is cause for government intervention. One such case is with cigarettes, which have adverse health effects both to smokers and third-parties. Thus they are considered demerit goods, and create negative externalities of consumption; so offering financial incentives to residents to quit is being considered.
Figure 1 shows how cigarettes would be allocated in a free market, with no intervention. The output of cigarettes is Qmkt, where market demand (MPB) is equal to market supply (MPC). However, at this point, the marginal social benefit (MSB) is less than the marginal private benefit (MPB), represented by marginal external cost (MEC). Hence, there is a DWL in the triangle shown in Figure 1. Assuming the “costs to the economy” are faced by third-parties, this is estimated at £13b. Therefore, to maximise the social surplus, fewer cigarettes should be consumed. Qopt is the theoretical point of allocative efficiency, where MSB equals MSC, resulting in no welfare loss.
The purpose of this intervention is to ‘bribe’ residents of Cheshire East to change their preferences, making them less willing to consume cigarettes through a monetary incentive to quit. Hence, cigarette consumption will decrease, shown in Figure 2.
The intervention will not cause demand for cigarettes in the UK to fall to the optimum level. This is largely because it will only be implemented in Cheshire East: any change in this small region is unlikely to reduce the national figure significantly (though the intervention could be expanded to the national level if successful). Thus MPB1 will not converge fully on the MSB; however, since at least some consumers in the UK will purchase fewer cigarettes, the market demand for cigarettes will decrease. Thus, the market provision moves from Qmkt to Qmkt1 – closer to Qopt, the social optimum. DWL is accordingly diminished, represented by the shaded area DWL1, which has shrunk; and the marginal external cost (MEC) is reduced to MEC1.
As stated, the decreases in the UK will be minimal because of the intervention’s limited scope. However, even in Cheshire East, neither the DWL nor the MEC would be completely eliminated, because the incentives will not cause all smokers to quit: some may be too addicted, or find the short-term pleasure derived from smoking to be more worthwhile than the monetary incentives offered by the intervention. Therefore, this is a partial rather than a complete solution.
Part of the debate about the merits of intervention versus the free market concerns unfair impacts on other stakeholders. The source of the council’s incentive payments in this intervention is taxpayer money; but the majority of taxpaying citizens don’t smoke. Therefore, it seems to reward those who have made bad lifestyle choices: former smokers gain both a financial boost, and the additional benefits derived from quitting. This violates the ‘polluter pays principle’, which suggests that those responsible for environmental harm should bear the cost of their actions. Instead, this council seeks to pay that cost through public money. Though it seems unfair, this solution may benefit the public good in the long-run: fewer smokers will burden the health service; productivity will increase as fewer smokers need time off for smoking-related illnesses; and residents may derive health benefits from reduced second-hand smoking.
However, the latter point is negligible for most residents, whose second-hand smoke exposure is minimal. Furthermore, even “relatively small sums of money” per smoker will still incur high opportunity costs: perhaps smokers ought to take responsibility for the damage they cause, so public money can instead be spent on merit goods which have positive externalities for the majority, like education.
An even greater issue with the intervention is that it is impractical. Although CO testing is being used to ensure recipient smokers do not ‘game the system’, this measure does not preclude non-smokers from pretending to be smokers, and then claiming vouchers for ‘stopping’. Any scheme with the size to have any impact will disproportionately open itself up to being gamed in this way, causing misallocation of taxpayer money.
Government intervention should only be used to attain societal goals such as equity or economic well-being when the free market is unable to. In this instance, the ‘solution’ itself is inequitable: non-smokers taxpayers must bear the costs, whilst smokers and fraudsters are rewarded. A better intervention would be to impose an indirect tax on cigarettes. Although their demand is price inelastic due to their addictive nature, the income effect would cause some decrease in their consumption, whilst bringing in some tax revenue. This could then be spent on anti-smoking campaigns, or even similar incentive schemes. This approach is more affordable, and aligns with the polluter pays principle, as smokers would bear the cost of their actions through tax.
Result
Averaged across this and two other commentaries:
Raw Mark: 41/45 (Grade 7)
Moderated Mark: 33/45 (Grade 6)