ChainWhat it assumes · how to break it
Start
People smoke cigarettes near others, exposing them to second-hand smoke, and smoking-related illness is treated by the NHS at taxpayers' expense.
1
As a result, smoking imposes external costs on others, through harm from second-hand smoke and the cost of treating illness, so the marginal social benefit of smoking is below the smoker's marginal private benefit.
external cost · MPB · MSB
external cost · MPB · MSB
Assumes: Part of the cost falls on people other than the smoker.
But: Much of the harm, such as the smoker's own illness, falls on the smoker and is a private cost, so the external cost may be smaller than it appears.
2
Since smokers decide how much to smoke by weighing their own benefit against the price, they ignore the cost to others.
self-interest · consumer decision-making
self-interest · consumer decision-making
Assumes: Smokers take no account of effects on others.
But: Many smokers choose to smoke outside or away from children, and bans on smoking in enclosed public places limit the harm to others.
3
Therefore, consumption settles at Q1 where MPB = MPC, above the social optimum Q* where MSB = MSC, so too many resources go into producing cigarettes.
overconsumption · social optimum
overconsumption · social optimum
Best link to attack
Assumes: The price smokers pay does not already include the external cost.
Assumes: The price smokers pay does not already include the external cost.
But: Tobacco duty in the UK is already high, so the price may already reflect much of the external cost, leaving consumption close to Q*.
End
Cigarettes are overconsumed: consumption at Q1 is above the socially optimal level Q*, so too many resources are allocated to them.
Evaluation chain
- E1However, the overconsumption depends on the price smokers pay leaving out the external cost.
- E2If tobacco duty already raises the price by roughly the external cost per packet, smokers already face the full social cost.
- E3As a result, consumption may already be close to Q*, and further taxes could push it below the social optimum.
- E4So the overallocation of resources is large in an untaxed market but may be small where duty is already high, though illegal untaxed tobacco keeps some consumption above Q*.
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Questions this answers
- Explain why a negative consumption externality leads to overconsumption.
- Using a diagram, analyse why the free market consumption of cigarettes is above the social optimum.
- Assess whether cigarettes are overconsumed in the UK today.
Diagram
MPB above MSB, with MPC = MSC (supply): market output Q1 where MPB = MPC, social optimum Q* where MSB = MSC, so Q1 > Q*. Mark the overconsumption as the distance Q*Q1.
Reverse and related
Positive consumption externality → MSB above MPB, so the good is underconsumed.