Optimal Regulation of E-cigarettes: Theory and Evidence

There is an active debate about how to regulate electronic cigarettes, due to uncertainty about their health effects and whether they are primarily a quit aid or a gateway drug for combustible cigarettes. We model optimal e-cigarette regulation and estimate key parameters. Using tax changes and scanner data, we estimate relatively elastic demand. A demographic shift-share identification strategy suggests limited substitution between e-cigarettes and cigarettes. We field a new survey of public health experts, who report that vaping is more harmful than previously believed. In our model’s average Monte Carlo simulation, these results imply that optimal e-cigarette taxes are higher than recent norms. However, e-cigarette subsidies may be optimal if vaping is a stronger substitute for smoking and is safer than our experts report, or if consumers overestimate the health harms from vaping.