What are the hidden Economic costs of Smoking?

When thinking about the costs of smoking, it’s fairly reasonable to suggest that almost everyone knows the answer; it has undoubtedly been asked and answered several times! Even so, Economists believe that economics is at the underpinnings of everyday life, and so can explain why people make the decisions that they do, or why and how certain outcomes arise (Levitt and Dubner, 2006).  Thus, Economists would turn to answer this question by delving not only into the direct but also indirect costs associated with smoking, which may be imposed and “hidden” from society at large.

The indirect cost we focus on surround externalities; a cost or a benefit imposed upon someone by the actions of others.

Let’s first turn to the above diagram, which illustrates the market failure of a negative consumption externality associated with smoking. We can see that the MPB is greater than the MSB, resulting in a Pareto-inefficient allocation (simply put, one individual is being made better off whilst making the other worse off). This leads to the overconsumption of cigarettes, creating an external cost which reduces the well-being of others indirectly affected.

The Private and Societal costs of Smoking 

Does buying cigarettes cost more than its upfront price? 

Yes, one suffers in terms of financial costs and a loss in productivity. These so-called private costs are hidden, because at face value they aren’t typically accounted for by individuals who smoke. Usually, smokers just account for the private cost of a packet of cigarettes. Diving deeper, the habit really strains the pocket. It consumes funds that could otherwise be spent upon necessities. Financially for low income households, this can have detrimental effects. Mainly due to the inelastic addictive nature of the product, meaning no matter any change in price demand will remain generally unaffected. 

What about other hidden private costs?

• Unsurprisingly, as more unhealthy smokers start buying insurance to protect themselves, the premiums rise to reflect the increase in risk. Imposing a negative spillover effect onto non smokers facing the increase in premiums, for which they aren’t compensated.
• Implicitly, smoking hinders employment prospects as a response to deteriorating productivity (Lee, 1991). An unforeseen cost that has big potential to cause discrimination in hiring or promotions, limiting career potential.

Is there an impact on Society?

Smoking is a cause of multiple illnesses. It not only increases the need for medical and social care services for the smoker but for those exposed to second hand smoking.

What does this mean in terms of the public provision of healthcare?

Well, the additional expenditure puts pressure on the health system, diverting resources from other financial and health matters. Which imposes a hidden cost on society, since smokers don’t factor in the magnified effects of smoking faced by the NHS.

What do these social costs look like?

• By 2023 it has measurably created an additional £3 billion annually to the provision of NHS and social care, with people who smoke requiring social care on average 10 years earlier than non-smokers (Department of Health and Social Care, 2023).
• Further, smoking creates higher demand for emergency services and increases the need for prolonged hospital stays. Hence reducing the capacity of medical services and worsening the backlog (Hopkinson, 2022).

Unfortunately, most individuals aren’t aware of how these hidden factors span across the whole of society.

Solutions to Smoking

So, what exactly can be done to get smokers to fully reflect the external effects of their actions, lessening the impact of this hidden economic cost on society, or at the very least make them aware of the repercussions this consumption has on themselves in the future?

Economists coin the term “internalising the externality”, first proposed by Nobel prize winner Ronald Coase. This is where producers of an externality (smokers in this case) bear the full external costs (or benefits) of their actions, mitigating the effects of any unwanted exposure of smoking on non-smokers.

Coase proposed this approach under the assignment of property rights, which essentially allows an individual or party to determine how things are used. However, given the context of smoking, these are extremely difficult to assign considering the many individuals who are affected by cigarette consumption and the externalities that result thereof; Coase’ condition involving property rights is more suitable to situations involving smaller groups of individuals (Parkin et al., 2008).

But thankfully, government intervention through the likes of regulation can protect public health by attempting to make the smoker consider and “internalise” the external costs imposed on themselves and on others, inducing efficiency!

What forms of regulation are in place for these hidden costs?

Well, the government currently has a tax on cigarettes set at the hefty rate of 16.5% RRP plus an additional £6.33 on a pack of 20 (HM Revenue and Customs, 2024). This means consumers spend a larger proportion of their income on tobacco products. Upon realising that, you’d expect smokers to be deterred from buying as many. However, we all know tobacco’s an addictive product, with an inelastic demand as signalled earlier. So, while not necessarily working as a deterrent to smoking habits, the tax does successfully achieve revenue for the government, like the £10 billion in 2022, that can be spent on additional preventative measures or funding the extra healthcare that smokers require (Indirect Tax Receipts Monitoring team, 2024).

However, it’s possible that a Pigouvian tax could be used instead, where its value would be set equal to the calculated social cost of smoking, aligning the MPC curve with the MSC curve in the diagram above, eliminating all external costs (Bowles et al., 2017).

The UK itself has implemented others schemes to reduce smoking and its hidden costs, like the mandated dark packaging with specific health-warning images. This is known as a behavioural nudge policy because it subconsciously influences decision-making without impacting consumers freedom of choice. An effective attempt to discourage smoking and make people reconsider the addictive habit since they’re reminded that ‘smoking kills’ every time they buy a new pack.

Reference list

Bowles, S., Carlin, W. and Stevens, M. (2017). Market successes and failures: The societal effects of private decisions. The Economy. [Online]. Available at: https://www.core-econ.org. (Accessed: 14 April 2024).

Department of Health and Social care (2021). Tobacco packaging guidance: Guidance for retailers, manufacturers and distributors of tobacco products, enforcement agencies and the public on tobacco packaging in Great Britain. Available at: https://assets.publishing.service.gov.uk/media/6079a6a88fa8f57356118bb2/tobacco-packaging guidance-great-britain-april-2021.pdf (Accessed: 14 April 2024).

Department of Health and Social care (2023). Stopping the start: Our New Plan to Create a Smoke free Generation. Available at: https://www.gov.uk/government/ publications/stopping-the-start-our-new-plan-to-create-a-smokefree-generation/stopping-the-start-our-new-plan-to-create-a-smokefree-generation (Accessed: 14 April 2024).

HM Revenue and Customs (2024). Tax on Shopping and Services: Alcohol and Tobacco duties. Available at: https://www.gov.uk/tax-on-shopping/alcohol-tobacco (Accessed: 14 April 2024).

Hopkinson, N. (2022). ‘The health and social care crisis makes tobacco control an imperative’. BMJ ,(379), pp.1-2. [Online]. Available at: https://www.bmj.com/c ontent/bmj/379/bmj.o2491.full.pdf (Accessed: 14 April 2024).

Indirect Tax Receipts Monitoring team (2024). Tobacco statistics commentary January 2024. Available at: https://www.gov.uk/government/statistics/tobacco-bulletin/tobacco-statistics-commentary-april-2023--2#:~:text=2023%2D% 2D2-,1.,than%20the%20previous%20financial%20year (Accessed: 14 April 2024).

Lee, D.R (1991). ‘Government v. Coase: The Case of Smoking’, Cato Institute, pp.151-164. [Online]. Available at: https://www.cato.org/sites/cato.org/files/serials/files/catojournal/1991/5/cj11n111.pdf#:~:text=It%20was%20Coase%20who%20pointed,who%20are%20engaged%20in%20it. (Accessed: 14 April 2024).

Levitt, S.D. and Dubner, S.J. (2006). Freakonomics. New York, NY: Harper Trophy.

Parkin, M., Powell, M. and Matthews, K. (2008). Economics. 7th edn. Harlow: Addison-Wesley Publishing.