The Tobacco and Vapes Bill: A Microeconomic Analysis of Policy Responses to Negative Externalities

 Can government intervention effectively correct market failures caused by tobacco and vaping, or does it risk new consequences?

 

Tobacco is the leading cause of preventable deaths in the UK, responsible for one death every five minutes (Warnock, 2023). To prioritize the health and safety of its citizens–particularly younger generations–the UK parliament introduced the Tobacco and Vapes Bill in 2024. This bill aims to prevent the legal sale of tobacco products to those born on or after 1st January 2009, creating a new tobacco-free generation. Alongside the supply of cigarettes, vapes, and other tobacco products, the bill also targets licensing and registration for retail stores selling these products. As of April 2026, the bill has been passed through both the House of Commons and the House of Lords and is set to become law in the week of the 27th

The Economic Problem

 

These policies are introduced in response to significant market failures within the tobacco and nicotine market such as negative externalities, asymmetric information, and moral hazard. Economic agents–consumers and producers–act to maximize their private benefits given the private costs they incur.

 

However, these decisions do not account for the external costs imposed on third parties as a result of economic activity. Tobacco consumption generates negative externalities such as increased public healthcare spending, sinking a whopping 3.1 billion to the government in the form of 1.9bn to the NHS and 1.2bn to local social care, as well as an unbelievable total cost to the UK of 18.3bn in lost productivity (A.S.H, 2024). Because these external costs are not reflected in market prices, the free-market outcome does not represent the true cost to society. “Externality is defined as a cost or benefit that affects a third party not directly involved in an economic transaction”, (Goolsbee et al, 2024).

 

This market failure is further exacerbated by asymmetric information and behavioral biases. Consumers, particularly younger individuals, may underestimate the long-term health risks associated with smoking and vaping. Tobacco companies contribute to this information asymmetry by downplaying the risks of their products through advertising and branding. In addition, the historical influence of tobacco companies on pop culture continues to shape perceptions today. As a result, consumers may overestimate the private benefits of smoking, such as social appeal or the enjoyment of flavors, leading to a biased decision-making and reinforcing overconsumption.

Figure 1: Negative externality of tobacco consumption

 

As shown in Figure 1, the overproduction of tobacco and nicotine products can be illustrated using a negative externality diagram. In an unregulated market, producers base their decisions on marginal private costs (MPC), ignoring the higher marginal social costs (MSC) associated with production. As a result, the equilibrium level of output is higher than the socially optimal level, while the market price is lower than the socially optimal price.

 

This leads to a deadweight loss, which refers to the loss of social welfare coming from economic inefficiency, represented by the reductions in total consumer and producer surplus between the socially optimal and market levels of output

Figure 2: Negative externality of tobacco production

 

The diagram above shows that the production of cigarettes creates a divergence between thr private and social benefits, pulling the social benefit down, rather than effecting the costs. This is represented as the gap between the MPB and MSB. In this unregulated market, there is a large amount of deadweight loss caused by the production of cigarettes.

 

The Economic Solution

 

The Tobacco and Vapes bill aims to correct this market failure. Through the implementation of stricter regulations, the overproduction will be minimized. Vaping products duty is set to be implemented from 1st October 2026, this is an example of Pigouvian taxing.

 

Pigouvian tax-

 

Raises the price of vapes to account for the external marginal costs. Despite the vaping products duty being implemented for minimizing social costs, its true effects are difficult to quantify due to the nature of externalities and this could be an over/underestimation given the volatile nature of the economy. The effect of the duty can be shown by a diagram below.

Figure 3.

 

Although the bill is effective in addressing negative externalities, it may also bring about some unexpected consequences. Due to the increase in taxes, the prices of tobacco and e-cigarette products will rise, putting greater economic pressure on low-income consumers (who spend a larger proportion of their income on such goods). Moreover, the smoking rate among low-income groups is often higher. Data from the UK consistently show that the lower the income or the lower the social economic status, the higher the smoking rate. (Fig. 4)

Figure 4, (NHS, 2021)

 

Another potential consequence we may see in the market from the implementation of the law is the formation of a black market for tobacco as the ‘Smoke Free Generation’ gets older. If the prices of tobacco and e-cigarette products are too high or are strictly restricted, some consumers may turn to illegal channels for purchase. These unregulated markets not only reduce the effectiveness of government policies but also may increase health risks, as the products sold illegally are not subject to quality control. Therefore, although the policy is effective in improving economic efficiency, it also creates fairness debates and faces practical challenges in implementation.

References

 

By UK Parliament Year: 2024 Container: Parliament.uk  https://bills.parliament.uk/bills/3879

 

Microeconomics

By Austan Goolsbee, Steven Levitt, Chad Syverson Year: 2024 Publisher: Macmillan Higher Education ISBN: 9781319066536

 

By NHS Inform Year: 2022 Container: NHS Inform URL: https://www.nhsinform.scot/healthy-living/stopping-smoking/reasons-to-stop/tobacco/

 

Tobacco kills one person every five minutes

https://news.cancerresearchuk.org/2023/05/31/tobacco-kills-one-person-every-five-minutes/

 

Latest figures show cost of smoking in England up 25% to at least £21.8 billion

https://ash.org.uk/media-centre/news/press-releases/latest-figures-show-cost-of-smoking-in-england-up-25-to-at-least-21-8-billion