Behavioral Welfare Economics and Fda Tobacco Regulations

57 Pages Posted: 10 Oct 2016 Last revised: 19 Oct 2016

See all articles by Philip DeCicca

Philip DeCicca

McMaster University - Department of Economics; Ball State--Department of Economics

Donald Kenkel

Cornell University - Department of Policy Analysis & Management (PAM); National Bureau of Economic Research (NBER)

Feng Liu

Shanghai University of Finance and Economics; The Chinese University of Hong Kong, Shenzhen

Hua Wang

Cornell University

Date Written: October 2016

Abstract

The U.S. 2009 Tobacco Control Act opened the door for new anti-smoking policies by giving the Food and Drug Administration broad regulatory authority over the tobacco industry. We develop a behavioral welfare economics approach to conduct cost-benefit analysis of FDA tobacco regulations. We use a simple two-period model to develop expressions for the impact of tobacco control policies on social welfare. 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 externalities and internalities, a tax or a nudge 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 link our analytical expressions to the graphical approach used in most previous studies and discuss the information needed to complete cost-benefit analysis of tobacco regulations. Finally, we use our model as a framework to re-examine the evidence base regarding the size of the relevant internalities.

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Suggested Citation

DeCicca, Philip and Kenkel, Donald and Liu, Feng and Wang, Hua, Behavioral Welfare Economics and Fda Tobacco Regulations (October 2016). NBER Working Paper No. w22718. Available at SSRN: https://ssrn.com/abstract=2850252

Philip DeCicca (Contact Author)

McMaster University - Department of Economics ( email )

Hamilton, Ontario L8S 4M4
Canada

Ball State--Department of Economics ( email )

United States

Donald Kenkel

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

120 Martha Van Rensselaer Hall
Ithaca, NY 14853
United States
607-255-2594 (Phone)
607-255-4071 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Feng Liu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

The Chinese University of Hong Kong, Shenzhen ( email )

Hua Wang

Cornell University ( email )

Ithaca, NY 14853
United States

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