Happiness is a more expensive nicotine hit

10th May, 2008

Would smokers prefer that cigarettes be expensive? The Office of Fair Trading seems to think so, to judge by its recent announcement alleging that some supermarkets and tobacco companies had been fixing the price of tobacco.

Certainly, higher cigarette prices would make smokers healthier. There is plenty of evidence that smoking is very bad for you, and almost as much evidence that people smoke fewer cigarettes if they are expensive. But “healthy smokers” are not the same thing as happy smokers.

So, do high cigarette prices make smokers happier? If smokers are rational, they don’t. But if smokers are wracked by temptation and are trying unsuccessfully to quit, then higher prices might make them happier by encouraging them to smoke less, or even to stop entirely.

This turns out to be a controversial point for economists, surely members of the only profession that could argue about whether smoking is rational. The “rational addiction” theory was put forward by the celebrated pair Kevin Murphy and Gary Becker, a Nobel laureate. They argue that people weigh up the health risks of smoking, the possible social and psychological benefits and the fact that it is habit-forming, before deciding whether to light up.

That is not as absurd as it sounds. Even smokers know that their habit is dangerous; in fact, the economist Kip Viscusi established that smokers overestimate the risks. And there is nothing necessarily irrational about deciding to embark on a course of action that many find enjoyable but that is painful to reverse. Otherwise marriage would be irrational, too. Addictive or not, the question is whether, for some people, the benefits might reasonably outweigh the costs.

A second possibility is that, rather than acting rationally, smokers are helpless puppets who will pay any price for a smoke. If so, expensive cigarettes are bad news for them; making them poorer without encouraging them to quit. But that possibility doesn’t fit the facts: we know that smokers respond to price signals by smoking less. They also smoke less if prices are expected to rise at some later stage. This implies that smokers both think about the future and recognise their own addiction, because a self-diagnosed addict who expects prices to rise may try to begin the difficult process of quitting before the habit becomes expensive.

A third possibility is that smokers are neither puppets nor ultra-rational robots, but simply creatures of flesh and blood. They recognise the risks and would like to quit, but keep valuing the short-term bliss of the nicotine hit over the longer-term benefits of kicking the habit. For smokers who fit this description, expensive cigarettes can indeed be a blessing by encouraging them to cut down or quit. Rational and temptation-wracked smokers behave in similar ways, smoking less if prices rise; they just feel differently about price-fixing in the cigarette market.

One way to resolve the debate is to ask smokers how they feel. Six years ago, the economists Jonathan Gruber and Sendhil Mullainathan did the next best thing, looking at two large sets of data on overall happiness, one covering Canada and one the US. By comparing what happened to happiness in US states and Canadian provinces where cigarette taxes rose, they were able to take an educated guess at whether high prices made smokers more or less cheerful. They had to make some heroic assumptions, but the results did point in the direction of the temptation model: where cigarette taxes rise, “potential smokers” – the people whose age, class, income and domestic circumstances suggest that they are likely to smoke – are happier. If the tobacco industry did collude to fix prices, at least it may have spread a little cheer while it did so.

Also published at ft.com, subscription free.

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