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

Author

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  • Helen Levy
  • Edward C. Norton
  • Jeffrey A. Smith

Abstract

Recent tobacco regulations proposed by the Food and Drug Administration have raised a thorny question: how should the cost-benefit analysis accompanying such policies value foregone consumer surplus associated with regulation-induced reductions in smoking? In a model with rational and fully informed consumers, this question is straightforward. There is disagreement, however, about whether consumers are rational and fully informed, and the literature offers little practical guidance about what approach the FDA should use if they are not. In this paper, we outline 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. We discuss 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. We describe the appropriate approach to welfare analysis under different assumptions about consumer information and rationality. Based on our reading of the theoretical and empirical literatures, we advocate using a behavioral public finance framework borrowed from the literature on environmental regulation. This approach applies standard tools of welfare analysis while allowing consumer behavior to deviate from rationality and full information without requiring specific assumptions about the reason for the deviation. The use of this approach would substantially reduce the confusion currently surrounding welfare analysis of tobacco regulation.

Suggested Citation

  • Helen Levy & Edward C. Norton & Jeffrey A. Smith, 2016. "Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?," NBER Working Papers 22471, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22471
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    1. repec:eme:aheszz:s0731-219920170000025005 is not listed on IDEAS
    2. Philip DeCicca & Donald Kenkel & Feng Liu & Hua Wang, 2017. "Behavioral Welfare Economics and FDA Tobacco Regulations," Advances in Health Economics and Health Services Research,in: Human Capital and Health Behavior, volume 25, pages 143-179 Emerald Publishing Ltd.
    3. Donald S. Kenkel & Sida Peng & Michael F. Pesko & Hua Wang, 2017. "Mostly Harmless Regulation? Electronic Cigarettes, Public Policy and Consumer Welfare," NBER Working Papers 23710, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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