Understanding the Basic Economies of Tobacco Harm Reduction

Minimising taxes on low risk tobacco products will improve public health


  • The branch of economics that studies preferences and choices as they relate to costs and benefits is the natural starting point – indeed the only apparent candidate for a rational starting point – for understanding these phenomena as they relate to tobacco/nicotine use.

  • Many implications of substituting low-risk alternatives (e-cigarettes, smokeless tobacco) for smoking, usually referred to as ‘tobacco harm reduction’, can be derived from even simple economic analysis. But such analysis has been largely avoided, limiting understanding and creating potentially harmful myths. Illiberal policies are hidden behind indefensible (and never actually defended) assumptions that contradict basic economics.

  • Substitution of a low risk product would be welfare-enhancing for most smokers. Some smokers will still prefer smoking to any available alternative, despite the much higher risk. But there are vanishingly few smokers for whom abstinence is a better choice than switching to a low-risk alternative. Thus there is no apparent ethical justification for anti-smoking measures that push for abstinence rather than switching.

  • The availability of low-risk tobacco/nicotine products will inevitably increase total consumption as compared to a world where cigarettes are the only option. This is the inevitable and rational effect of lowering the costs of a consumption choice. It is properly counted as an additional benefit, though it is widely derided as a cost. Public supporters of low-risk products who condition their support on those products not attracting any new users are either being naïve or cynically imposing conditions they know cannot be met.

  • For any remotely defensible goal, including minimising population health risk, the optimal level of excise tax on low-risk products is zero (assuming that is the lower bound; a subsidy would be better still). This is sometimes presented as if it were immediately evident from the comparative risk, but that is not actually a valid claim. However, simple economic analysis shows that it is the case.

  • Many of the proposed bases for denying the economic model are vacuous upon closer examination. Those that are valid, such as a history of tobacco use creating a desire for continuing use, can be incorporated into the model in a straightforward way. The concept of ‘addiction’, in particular, is best understood in the context of the model and its implications do not alter the economic analysis.

  • While the basic economic model is clearly not perfect, it is close enough to be informative and is the only apparent candidate as an analytic foundation for further analysis. There is no apparent defensible theory of choice and benefits that provides a viable alternative to standard economic thinking.

2016, Discussion Paper No. 72

This paper featured in City AM and Economia.

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