Undercover Economist

The true cost of smoking

England’s smokers are about to be banned from lighting up in pubs, restaurants and offices. The ban will be convenient for me: I don’t smoke, and I don’t like smoky pubs. Sadly, the government has not formally adopted a policy of formulating law for my personal convenience. The smoking ban is justified instead using fancy-sounding economic arguments about the ”externalities” of smoking.

I like economic arguments as much as anyone, but in this case they do not point in quite the direction that most people seem to think. An ”externality” seems a simple enough concept: it’s a harm suffered or benefit enjoyed by some third party that isn’t reflected in a market transaction. Pollution is the classic example. The idea is important, because even pro-market types believe that externalities are a market failure potentially justifying the government’s involvement.

Yet the only credible arguments for restricting smoking have nothing to do with economics. The damage caused by second-hand smoke in pubs is not an externality. Neither is the cost to the National Health Service of treating smokers. An ”externality” is not just any old cost or benefit; it has to lie outside a market transaction.

In the case of pubs and restaurants, the market could hardly be more obvious…

Continued at ft.com, subscription free.