Tobacco Regulation and Cost-Benefit Analysis: How Should we Value Foregone Consumer Surplus?

This paper outlines 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. It discusses 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. It describes the appropriate approach to welfare analysis under different assumptions about consumer information and rationality. Based on our reading of the theoretical and empirical literatures, also advocates using a behavioral public finance framework borrowed from the literature on environmental regulation. [Working Paper 22471]