Helen Levy, Jeff Smith, and Edward C. Norton released a study entitled, “Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?”
Due to Executive Order 12866, an economic analysis that shows the costs and benefits of “economically significant” regulation is required. The authors begin by outlining why this value of foregone consumer surplus is important in the cost-benefit analysis of tobacco regulation.
The foregone consumer surplus comes into play when the health of the individual is compared to the lost enjoyment from not smoking, and when considering how that surplus should be valued. Coming up with the correct value depends on the degree to which consumers are aware of health risks associated with smoking and the rationality of their behavior. The authors’ state that the “goal of this paper is to address these questions to help inform economic impact estimates associated with future tobacco regulations.”
Find the abstract below or read the paper in its entirety here.
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.