Economics explains why e-cigarettes should not be blocked

 Whether smoking and other tobacco use is a disease is a consumer decision. Therefore, trying to understand it through a medical lens, rather than welfare economics (the science of consumer preferences and choices), creates confusion, absurd claims, and poor public policy.

These errors are particularly harmful in discussions about low-risk alternatives to smoking, known as 'tobacco harm reduction'. Alternatives, including e-cigarettes and smokeless tobacco, have health benefits that are essentially the same as quitting completely. Unfortunately, this promising option has been hampered by a lack of basic economic analysis.

There is a heated debate, for example, about the appropriate level of 'sin tax' imposed on e-cigarettes. As I show in a discussion paper from the New Economic Affairs Institute (Understanding the Basic Economics of Tobacco Harm Reduction), a bit of economic analysis provides a clear answer: zero.

This is true for any tax rate on cigarettes aimed at reducing health risks or improving public health. Increasing the purchase price will discourage non-smokers from switching to e-cigarettes and will prevent smokers from quitting. E-cigarettes may not be completely risk-free, but even if every non-smoker starts using them, the overall health impact will be less than that of smokers who switch.

Economics also shows that for most smokers, switching to low-risk alternatives is a better choice than quitting completely. We do not know how many smokers will continue to enjoy smoking, but almost every smoker's welfare will improve by switching rather than quitting. Switching offers the most complete cessation (avoiding the health risks of smoking) while allowing many individuals to retain the benefits derived from smoking.

People often think that the only advantage of switching comes from those who would not choose to become abstinent but would prefer to switch to smoking. This is certainly a significant benefit, but it overlooks the additional benefits of using alternative products rather than becoming abstinent.

For those who enjoy consuming nicotine or other aspects of tobacco products, this is very important. Therefore, if the goal of public policy is to genuinely improve people's lives, encouraging abstinence above all else, while anti-smoking policies only provide a second-best option, is illogical and self-defeating.

Lessons from economics do not fit well with advocates of low-risk alternatives. Anti-smoking activists want to suggest that any new tobacco product, no matter how low-risk, is a necessary evil that must be stamped out. Advocates of e-cigarettes are often criticized for claiming that e-cigarettes do not increase the number of nicotine users but merely replace smoking.

Simple economics tells us otherwise: reducing the consumption of products like these (such as through reduced nicotine consumption) will lead to more people consuming them. From an economic perspective, this is a benefit, not a cost, because anyone who freely chooses to use a product must do so because it provides net benefits. It is an undisputed observation that some people rationally avoid smoking due to medical costs, but it is equally true to say that they would prefer to smoke or use similar products if the health costs did not exist. Tobacco is a very popular drug, even in its high-risk forms, so it clearly provides significant benefits to many people.

It is worth noting how much controversy and misunderstanding about tobacco harm reduction can be resolved with this fundamental economic phenomenon through simple economic analysis. Consumer welfare can only be understood from an economic perspective.

Economic science cannot tell us the medical significance of these phenomena, of course, but health science cannot inform us about the impacts of choices, preferences, and welfare. Drawing conclusions about public policy based solely on health science almost always leads to poor policy.