Human Capital and Health Behavior by Bolin Kristian; Lindgren Björn; Grossman Michael

Author:Bolin, Kristian; Lindgren, Björn; Grossman, Michael
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2017-05-17T00:00:00+00:00

Keywords: Tobacco; regulations; FDA; cost-benefit analysis

INTRODUCTION

Over the past 50 years the United States and other countries have enacted a range of antismoking policies including health information campaigns, excise tax hikes, and bans on smoking in public places. The U.S. 2009 Tobacco Control Act (TCA) opened the door for new antismoking policies by giving the Food and Drug Administration (FDA) broad regulatory authority over the tobacco industry. The TCA bans cigarette sales to minors, requires new graphic warning labels, bans flavored cigarettes other than menthol, and bans the use of misleading terms such as “light” in cigarette marketing. Beyond these specific requirements, the FDA is considering using its authority under the TCA to make additional product regulations such as banning menthol cigarettes, reducing cigarette nicotine content, and banning flavors in small cigars. The TCA does not allow the FDA to completely ban cigarettes or nicotine.

The TCA requires the FDA to design tobacco regulations to promote public health. However, regulations that promote public health do not necessarily improve consumer welfare. In the absence of the regulations, smokers could reap the same health benefits by voluntarily quitting or cutting down. FDA tobacco regulations potentially improve consumer welfare by preventing internalities when smokers fail to optimize. This poses a dilemma for applied welfare economics: when smokers fail to optimize, their observed consumption choices are not reliable indicators of the choices that would maximize their experience utilities.

We develop a behavioral welfare economics approach to measure the impact of FDA tobacco regulations on consumer welfare. While the TCA creates a public health standard for tobacco regulations, Executive Order 12866 also requires the FDA to conduct cost-benefit analysis (CBA) (FDA, 2010, 2011, 2014, 2016). We contribute to an emerging line of research that addresses the challenges of conducting CBAs of regulations that affect smoking and other addictive consumption (Ashley, Nardinelli, & Lavaty, 2015; Australian Productivity Commission, 2010; Cutler, Jessup, Kenkel, & Starr, 2015; Jin, Kenkel, Liu, & Wang, 2015; Levy, Norton & Smith, 2016; Weimer, Vining, & Thomas, 2009).

The next section provides more background about FDA tobacco regulations and discusses the distinction between nudges versus paternalistic regulations that limit choices or create large disincentives. The following section uses a simple two-period model to develop expressions for the impact of tobacco control policies on social welfare. Our model is an example of the reduced-form approach to behavioral welfare economics (Chetty, 2015; Mullainathan, Schwartzstein, & Congdon, 2012). Our model includes: nudge and paternalistic regulations; an excise tax on cigarettes; internalities created by period 1 versus period 2 consumption; and externalities from cigarette consumption. Our analytical expressions show that in the presence of uncorrected internalities and externalities, a nudge or a tax to reduce cigarette consumption improves social welfare. In sharp contrast, a paternalistic regulation might either improve or worsen social welfare. Another important result is that the social welfare gains from new policies do not only depend on the size of the internalities and externalities, but also depend on the extent to which current policies already correct the problems.

We

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