Economics Explains Why E-Cigarettes Should Not Be Blocked

 Smoking and other forms of tobacco use are not a disease; they are consumer decisions. Trying to understand them through a medical lens, rather than through welfare economics (consumer preferences, the science of choice, and welfare), creates confusion, absurd claims, and poor public policy.

These errors are especially harmful in discussions about lower-risk alternatives to smoking, part of what is known as “tobacco harm reduction.” Alternatives, including e-cigarettes and smokeless tobacco, carry such low risk that switching to them can provide health benefits that are in many respects comparable to quitting entirely. Unfortunately, serious consideration of this promising and beneficial option has stumbled because of a lack of basic economic analysis.

There is fierce debate, for example, over the appropriate level of “sin tax” to impose on e-cigarettes. As I showed in a new Institute of Economic Affairs discussion paper (Understanding the Basic Economics of Tobacco Harm Reduction), even a little economic analysis makes the correct answer clear: zero.

This is true regardless of the tax rate on cigarettes, whether the goal is to reduce health risks or to make people better off more generally. Raising the purchase price of e-cigarettes will discourage smokers from switching. E-cigarettes may not be completely risk-free, but even if every non-smoker started using them, the overall health impact would still be smaller than the reduction in risk achieved by smokers who switch.

Economics also suggests that, for most smokers, switching to a lower-risk alternative may be a better option than quitting nicotine entirely. We do not know how many smokers would continue to prefer smoking despite the health risks if e-cigarettes and other alternatives were available, but for almost every smoker, welfare would improve through switching just as it would through quitting—or at least still improve. Switching offers many of the benefits of quitting completely (avoiding the health risks of smoking) while preserving many of the benefits individuals derive from smoking.

People often assume that the only advantage of switching comes from reducing health risks for those who would never choose to quit smoking but might be willing to switch. That is certainly a major benefit, but it ignores the additional benefits of using alternative products rather than becoming abstinent.

For those who enjoy consuming nicotine or other aspects of using tobacco products, this is very important. Therefore, if the goal of public policy is truly to make people better off, then encouraging abstinence above all else—while treating switching as merely an inferior second-best option in anti-smoking policy—is backward and difficult to justify.

The lessons of economics are not entirely comfortable even for advocates of lower-risk alternatives. Anti-tobacco campaigners like to suggest that any use of new tobacco products, no matter how low-risk, is a persistent evil that must be stamped out. Advocates of e-cigarettes often challenge that premise, but claiming that e-cigarettes will not increase the number of nicotine users and will only replace smoking does not answer the issue.

Basic economics tells us otherwise: reducing the cost of consuming a product that people value (for example, by lowering the health damage caused by nicotine consumption) will lead more people to consume it. From an economic perspective, that is a benefit, not a cost, because anyone who freely chooses to use a product must be doing so because it provides net benefits. It is uncontroversial to observe that some people rationally avoid smoking because of the health costs, but that is effectively the same as saying they would prefer to smoke or use a similar product if those health costs did not exist. Tobacco is a very popular drug even in its high-risk form, so it clearly provides substantial benefits to many people.

It is striking how much controversy and misunderstanding about tobacco harm reduction can be resolved through simple economic analysis of this fundamental economic reality. 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 tell us about their effects on choice, preferences, and welfare. Drawing public-policy conclusions solely from the science of health almost always leads to bad policy.