Cigarette Consumption Market Failure and Interventions

Cigarette Consumption Market Failure and Interventions

Cigarette Consumption: Market Failure and Interventions

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Cigarette Consumption: Market Failure and Interventions

Q1: Cigarette Consumption as a Market Failure

This report section uses factual data to elucidate cigarette consumption as a market failure.


Market failure happens when the best possible resource allocation in free markets is unattained or when price mechanisms fail to account for all costs and benefits of production or consumption of goods/services (Lumen Learning, n.d; Nawrot & Para, 2014). Market systems and their structures influence market failure by failing to supply socially optimal amounts of goods. Consider the figure below.

4241803777615Figure SEQ Figure * ARABIC 1: Demand-Supply negative externalities of cigarette consumption

Source: (Adapted from Sophia H Economics (2013))

Figure SEQ Figure * ARABIC 1: Demand-Supply negative externalities of cigarette consumption

Source: (Adapted from Sophia H Economics (2013))

Before market failure occurs, the demand and supply within the market system fail to produce quantities of cigarettes in a way where their price reflects marginal consumption benefit as the curve shows (Lumen Learning, n.d). Such imbalances culminate in resource allocation inefficiencies (Munich, 2018; Ventura, Cafiero, & Montibeller, 2016) manifested as either product under-consumption or over-consumption. Besides allocative inefficiencies, real-world markets experience production inefficiencies, public good scarcities, environmental concerns, and externalities that contribute to market failure.

Externalities are effects (costs or benefits) on third parties emanating from the consumption or production of goods/services (Leal et al., 2017; Nawrot & Para, 2014). While positive externalities refer to product actions that generate positive effects on third parties, negative externalities are product outcomes that inflict negative effects on them. The diagram below depicts the voluntary exchange in a cigarette market system and the economic costs and benefits regarded as associated externalities.

95252093595Figure SEQ Figure * ARABIC 2: Externalities in voluntary exchange in a cigarette market system

Source: (Adapted from adapted from Lumen Learning (n.d))

Figure SEQ Figure * ARABIC 2: Externalities in voluntary exchange in a cigarette market system

Source: (Adapted from adapted from Lumen Learning (n.d))

While positive and negative externalities do not cause market failure directly, they contribute to economic inefficiencies that cause market failure (Guhl & Hughes, 2006). Externalities directly influence efficiency in that the production of goods is inefficient if the costs are incurred owing to damages. Economic inefficiency increases when potential money earned from products is lost on non-paying third parties (Lumen Learning, n.d; Ventura et al., 2016).

Analysis of Relevant Data and Evidence

Six negative effects of cigarette consumption that make it a market failure have been identified in the U.S. and England:

Financial Costs

Tobacco smoking has financial consequences on health care, life insurance, and people’s pension (Tiihonen et al. 2012). In the U.S. the direct financial costs of smoking are US$300 billion out of which about US$170 billion accounts for adult medical care annually (CDC, 2019). Of the US$170 billion, 32.7% goes to hospital care, 19.9% to clinical and physical services, 4.8% to nursing home care facilities and continuing care for pensionable retirement communities, and 9.5% to prescription drugs (CMS, 2018). The rest goes to ambulatory care, paramedics, domestic healthcare services, public health activities, professional services, health insurance, and smoking-related medical equipment (Ekpu & Brown, 2015). In England, the direct financial costs of smoking incurred by NHS are £2-6 billion annually, with communities and local authorities incurring annual healthcare costs of £12.6 billion and £760 million respectively (ASH, 2018).

Health Costs of Environmental Tobacco Smoke

Environmental tobacco smoke (ETS) exposure causes substantial health costs in both countries. In the U.S., the direct health costs associated with EST include mortality costs relating to heart diseases and cancers of the lung, breast, colon, pancreas, and rectum, and COPD, which amount to over US$4.6 billion currently (Carreras et al., 2019; Yao et al., 2018). In England and Europe, the health costs of ETS amount to €0.38 billion (0.03% of total cigarette-consumption-related healthcare costs).

Estimated Treatment Costs and Productivity Loss

In the U.S., cigarette consumption and the associated diseases cause US$500 billion in economic damage, US$151 in productivity loss, and US$170 billion in treatment costs (Bolger, 2020; CDC, 2019; Ekpu & Brown, 2015). In England, cigarette consumption and related diseases cause £823 million in productivity loss, besides the £2 billion financial losses incurred in healthcare and treatment (ASH, 2018; National Elf Service, 2020).

Exposure to Secondhand Smoke

The costs associated with secondhand tobacco smoke in the U.S. is over US$10 billion, including US$ 5.6 billion in productivity loss due to exposure to secondhand tobacco smoke while in England, these costs are nearly £23.3 million (ASH, 2014; CDC, 2019).

Quality of Life and Life Expectancy

Cigarette consumption causes negative health concerns, brings about smoke-related morbidities and illnesses, accelerates aging, and causes loss of function, all of which culminate in a poor quality of life (Sagtani, Thapa, & Sagtani, 2019). Calculations of quality-adjusted life expectancy (QALE) show that averagely, smokers reduce their life expectancy by a minimum of 10 years compared to nonsmokers (Jia et al., 2013).

Based on these negative effects, cigarette consumption is a market failure in the U.S., England, and the world.

Additional Developments

Economic Perspective on Taxing Tobacco Products

In the U.S., the average state and federal excise taxes on cigarettes account for 44.3% of their retail prices while in England, the present excise duties levied on cigarettes account for about 57% of their prices (CDC, 2019; Sanco, 2012). The economic perspective on taxing cigarettes is the reduction of tobacco consumption aimed at reducing the associated economic and health costs while saving lives (Cherukupalli, 2010; Ventura et al., 2016).

Price Elasticity and Efficiency of Taxing Cigarette Consumption

Research consistently indicates that an increase in tobacco products’ prices are associated with moderate reductions in percentages of smokers and the number of cigarettes remaining for consumption (IARC, 2011; World Bank, 1999). These declines occur because increases in tax encourage existing consumers to quit, dispirits nonsmokers from starting, and discourage former smokers from resuming smoking. So, taxing cigarette consumption causes a negative price elasticity. Averagely, the mean price elasticity of taxing cigarettes is -0.48, implying that a 10% increase in price causes a 4.8% consumption decrease (Mili, 2017).

Price Elasticity and Youth/Income/Gender

Generally, no gender differences exist in tobacco products’ price sensitivity. However, a study by Gallet and List G (2003) established that teenagers show greater responsiveness to cigarette prices with an average price elasticity of -1.43 compared to adults whose price elasticity is -0.32.

Relationship between Income and Cigarette Consumption

An increase in household income causes an increase in consumption (Lund, 2015). Past research established that a 10% household income increases cigarette consumption by 6.5%, especially among low-income households (Adioetomo & Djutaharta, 2005).

Q2: Government Interventions for Cigarette Consumption Externalities


The report’s first section established that cigarette consumption is a market failure characterized by several negative externalities. So, involved governments should develop, design, and implement interventions that best reduce these externalities. This part of the report seeks to identify and evaluate two government interventions targeted at lessening the cigarette consumption externalities. It also reviews and assesses the results, short-term effects, and long-term impacts of these three interventions.

Government Intervention 1: Tobacco Price Increments

This government intervention entails decreasing tobacco smoking prevalence by increasing cigarette prices effected by increasing tobacco products’ taxes and customs duties (Zhu et al., 2012). Over the years, studies have indicated that higher tobacco prices have been an effective intervention because it deters nonsmokers from starting smoking, encourages smokers to quit completely or reduce their smoking behaviors, and dissuades former smokers from recommencing smoking predispositions (Cherukupalli, 2010; Contreary et al., 2015). In the U.S., state and federal governments have influenced the increase in cigarette prices through taxation in more than two decades via real price adjusted for varying dollar values (Zhu et al., 2012). States increase cigarette tax rates at different times to allow for the testing of the impact of price changes in influencing smokers’ behaviors. A consistent outcome realized throughout these states is that an increase in prices through tax increases cause a decrease in cigarette consumption. The impact has been found to be greater among low-income earners, corroborating suggestions by Adioetomo and Djutaharta (2005) and IARC (2011).

Survey-based studies have examined the effectiveness of this government intervention by exploring how smokers change their behaviors in response to price increases. Zhu et al. (2012) suggest that these studies have found four outcomes the first of which is that a majority of smokers adopt price-avoidance approaches, including buying cheaper cigarette brands. Other smokers have resorted to quitting completely while others attempt to quit smoking in response to increments of taxes than to smoking bans adopted in workplaces. Other studies have found an augmented quitting activity characterized by smokers calling quitlines when cigarette prices increase. Based on these outcomes, it is evident that this government intervention has been effective in lessening tobacco product consumption and its negative externalities.

The diagram below is a price elasticity curve that helps to comprehend how tax increases influence a reduction in tobacco consumption behaviors.

4667254025265Figure SEQ Figure * ARABIC 3: Cigarette Markets When Tax Is Increased

Figure SEQ Figure * ARABIC 3: Cigarette Markets When Tax Is Increased

In the diagram, the government increases the unit excise tax of a single pack of cigarettes. This tax increment causes the pack’s price to increase by US$1.50 from US$2.00 to US$3.50. Consequently, the supply of cigarettes shifts upwards from S2 to S1 due to the price increase, but the equilibrium demand for these tobacco products shifts downwards from (point b) that corresponds with Q1 to (point c) that corresponds with Q2. This reduction in demand means that some smokers have reduced their smoking behaviors, others have quit smoking completely, and others have opted to purchase cheaper cigarette brands. From an economics perspective, this implies that the intervention causes a short-term negative mean price elasticity as Mili (2017) subscribes to, an indication that it works effectively in reducing the negative externalities of cigarette consumption.

A real-world example is where a cigarette pack costs US$5.51 in the United States and the excise tax per pack is 44.3% of its retail prices (CDC, 2019). If the government increase the tax from 44.3% to 49%, the price would increase from US$5.51 to US$ 6.09 to maintain equilibrium. Consistent with what the diagram above depicts, these would shift the equilibrium supply upwards while shifting the equilibrium demand downwards characterized by a short-term change in price elasticity. The decrease in demand would be a reflection of reducing cigarette consumption, which would subsequently reduce its negative externalities in the long-term.

Government Intervention 1: Quitline Capacity Augmentation

This intervention encompasses a behavioral counseling and cessation service with multiple practice guidelines accessible to smokers through telephone as part of comprehensive cigarette control programs (Lichtenstein, Zhu, & Tedeschi, 2010; Waters et al., 2015). Quitlines have been an evidence-based intervention for treating negative externalities of tobacco product consumption in the U.S. with success stories for decades. While California was the first state to implement this intervention experimentally, other states have continually adopted national toll-free tobacco regional and statewide quitlines to tackle cigarette consumption among different pollutions (Zhu et al., 2012). According to an investigative survey-based study by Carlini et al. (2008), the rates of utilizing state quitlines in the U.S. ranged between 0.01% and 4.28% of smokers.

Accordingly, the government can make this intervention even better by augmenting the capacity of quitlines through strategic budgetary funding, sponsorship, generating referrals to quitline service providers, and proactive promotional efforts through anti-smoking media campaigns. By augmenting the capacity and efficacy of tobacco cessation quitlines, the government would lessen the externalities of tobacco consumption in three ways. The first is by maximizing the utilization of the available and accessible state-sponsored counseling strategies (Croyle, 2010). The second is by leveraging policy reforms to disseminate information rating to the availability of new treatments and therapies for tobacco dependence while offering opportunities for synergizing cessation efforts and cigarette counter-marketing. The third is by ameliorating counseling follow-up to promote accountability, social support, and individualized health systems that incorporate tobacco-dependence therapies into routine clinical care for cessation reinforcement (Lichtenstein, Zhu, & Tedeschi, 2010).

As already mentioned, one way of augmenting the capacity and effectiveness of quitlines entails proactive promotional efforts via anti-smoking media campaigns. The diagram below is an example of a model that the U.S. government can use in designing and employing a media campaign to sensitize smokers about the essence of quitlines. Looking at the diagram, the government can design an anti-smoking media campaign aimed at raising awareness of smokers about the availability of statewide quitlines.

95254229100Figure SEQ Figure * ARABIC 4: Flow diagram of the intervention package of mass media promotion of quitlines

Source: (Adapted from Nghiem et al. (2018) and modified)

Figure SEQ Figure * ARABIC 4: Flow diagram of the intervention package of mass media promotion of quitlines

Source: (Adapted from Nghiem et al. (2018) and modified)

Then, smokers are directed on how to access them and obtain counseling services. Those who successfully increase their awareness through the media campaign to leverage quitlines to quit smoking are transformed into ex-smokers. The characteristics of these ex-smokers are improved quality-adjusted life expectancy (QALE), greater quality-adjusted life years (QALY), lessened risk of tobacco-related illnesses, and reduced health costs emanating from these ailments. Those who use the media-campaign-based awareness to reach to quitline services but relapse or fail to quit are advised through the ongoing media campaigns on how to access alternative interventions. These alternatives are supplemented by additional counseling through quitlines, and with this, they quit smoking to become ex-smokers with similar benefits/characteristics as listed above. In the long-term, this intervention (quitlines promoted through media campaigns) succeeds in reducing tobacco consumption, translating to reduced tobacco consumption externalities.

A real-world example of augmented quitline capacity is where the government gives the Secretary of Health and Human Services the authority and mandate to revise the graphic health warnings on cigarette packing. A new trend in this mandate is the requirement to include telephone quitlines as part of these health warnings labels (Hammond, 2011). The inclusion of these quitline numbers in health warnings labels supplement the anti-tobacco media campaign designed using the model in the diagram to augment the effectiveness and capacity of quitlines in reducing tobacco consumption externalities.

Intervention Comparisons and Evaluation

Each of these two interventions has advantages and disadvantages. As regards increasing cigarette prices by increasing taxes on them, several advantages are evident one of which is the improvement of smokers’ and nonsmokers’ health and well-being. Increasing taxes on cigarettes lessens their affordability, thereby discouraging their consumption, culminating in improved health, quality of life, and general wellbeing of people (Cherukupalli, 2010; Ventura et al., 2016). The second advantage is the reduced societal burden of disease and mortality. When health and wellbeing are improved, the long-term outcome is a reduction in the burden of disease. The third advantage is that tobacco tax increments assist in moderating market failures that arise from negative cigarette consumption externalities. The fifth advantage is that added taxes on these products mean added revenues for the government, which can be used for funding other tobacco interventions (Contreary et al., 2015; IARC, 2011). The sixth advantage is the reduction in the amount of lost economic output from lost productivity and tobacco-associated mortality and diseases (Yao et al., 2018). The last advantage is that tax increments externalize preventable health costs incurred by society to treat tobacco-related illnesses. Even so, this intervention has a few disadvantages one of which is that while tax revenues increase in the short-term, they will eventually decrease in the long-term as demand and supply patterns change. Also, increasing tobacco taxes can trigger incidents of tax evasion and fuel cigarette smuggling, hence stimulating high consumption rates. Lastly, tax increments widen the income gap and affect employment patterns.

On its part, the intervention of quitline capacity enhancement has four advantages identified by Lichtenstein, Zhu, and Tedeschi (2010). The first is that quitlines allow for convenient telephone counseling on tobacco cessation as logical treatment barriers are eliminated and service utilization is boosted. Secondly, improved quitlines ensure a quick progression of initial counseling sessions facilitated by the semi-autonomous nature of counseling discourses. The third advantage is that quitlines allow for follow-up counseling services, which make the cessation therapy naturally proactive with high probabilities of success in attrition reduction. The last advantage is that telephone quitlines provide a structured counseling protocol that ensures minimum acceptable content, making the intervention suitable for large-scale applications (Lichtenstein, Zhu, & Tedeschi, 2010). Its disadvantages are added costs and the inability to support customized counseling for people with health disorders.

Regarding the short-term impacts of these interventions, the short-term impact of increasing tobacco prices via tax increments is the upward shift in the supply of cigarettes (See Figure 3). Conversely, the short-term impact of the quitline intervention is that counselors gain an accurate clinical picture of smokers cessation needs. The long-term impact of increasing tobacco prices by increasing taxes is the downward shift in cigarette demand and consumption (Mili, 2017; Sophia H Economics, 2013). The long-term impact of the quitline intervention is increased quit rates (Zhu et al., 2012). As far as these two interventions are concerned, no government failures have been registered as both are associated with success stories.

Overall, these two interventions have guaranteed sustainability. Increasing tobacco taxes is sustainable because these taxes generate sustainable revenues that can fund more options for reducing tobacco consumption. Quitlines are sustainable in that states are forming partnerships for enhancing quitline sustainability. Such include the NAQC Public-Private Partnership Initiative aimed at ensuring the sustainability of quitlines in Texas, Utah, and nine other states (NAQC, 2014). The success chances of these interventions in reducing tobacco consumption externalities can only be established from quit rates after their implementation.

Finally, the policy implications of tobacco price increases through tax increments are changes in policy efforts in determining factors such as minimum floor price, minimum mark-up rules, taxation structures, and industry pricing strategies (Whitehead et al., 2018). The health implications of this intervention are reductions in smoking-attributable deaths, disease burden, and healthcare costs (Yao et al., 2018). The policy implications of quitlines include expansion of smoking cessation programs to include new quitline requirements, the implementation of home smoking bans, and new technology-centered awareness campaigns (Yuan et al., 2019). Its health implication includes the professionalism of counselors involved in using quitlines in identifying how to deal with smokers with health and substance use disorders.

Summary of Research and Conclusions

Two key points were discovered from the analysis and evaluation. The first is that tobacco consumption is associated with negative externalities, hence qualifying to be regarded as a market failure. The reason is that its impacts on health, quality of life, and wellbeing are detrimental, meaning that tobacco consumption only produces negative externalities. The second point is that tobacco tax increases are a measure with the highest proven cost-effectiveness in lessening tobacco consumption and its negative externalities. The reason is that it generates majorly long-term outcomes rather than short-term ones. While the two interventions are effective in suppressing these externalities, tax increments should be chosen in the United States context because of their cost-effectiveness.


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