Microeconomics: Market Failure (negative externalities in consumption and policies)

Microeconomics: Market Failure (negative externalities in consumption and policies)

Extract adapted from The Straits Times:

 

 ECONOMIC ISSUE: Negative externalities in consumption of cigarettes

Consumption of cigarettes generates negative externalities

Negative externalities refer to the cost of production or consumption that is incurred by people other than the producers or consumers of the good, for which no compensation is being made. The negative externalities generated thus give rise to external costs. When negative externalities exist, Marginal Social Cost(MSC) exceeds Marginal Private Cost(MPC). In this case, the consumption of cigarettes generates negative externalities.

In a free enterprise economy, the price mechanism only takes into account private costs and benefits, ignoring all externalities. To the individual consumer, he only takes into account the private costs of consuming the cigarettes, like the cost of purchasing the cigarettes. He consumes up to the point where Marginal Private Benefit(MPB) = Marginal Private Cost(MPC), where private efficiency is attained. He does not take into account the external costs like the increased cost of health care for asthmatic people who inhale the second hand smoke, increased cost of government provision of healthcare as well as increased cost to hire cleaners to clear cigarette buds. Hence, output is registered at Q1. However, the socially efficient output level is at Q2, where MSC = MSB.

At Q1, MSC > MSB. One extra unit of output adds more to Singapore’s costs than benefits. According to the 2010 National Health Survey, the proportion of smokers among young Singaporeans aged 18 to 29 stood at 16.3 per cent in 2010 - a 33 per cent increase from 12.3 in 2004. Resources are over allocated to the consumption of cigarettes, hence generating negative externalities, in which a welfare loss to society is incurred, which is represented by the yellow shaded area above. The market fails since economic efficiency is not achieved at Q1. By decreasing consumption of cigarettes, welfare loss to society can be avoided.

Laws/ regulation to reduce the consumption of cigarettes

 The prohibition of smoking at all public places is an effective way of controlling the negative externalities generated such as lung cancers due to second-hand smoke. By reducing the number of places that people can smoke, it effectively reduces the incidents of people smoking and hence cut down on the external costs generated by people who smoke excessively.

A $1,000 fine for smoking in public places has been implemented. Fear of punitive measures ensures that the public will abide by the legislation hence the socially efficient output will be attained.

Legislations ensures certainty in outcome where the number of people smoking in public places will fall. Legal regulations are easy to understand, implement and are relatively easy to monitor. Random spot checks or checks based on public complaints can be made and those who flout the regulations are then heavily fined. The penalties, if set high enough acts as an effective deterrent to prevent undesirable smoking that imposes negative externalities on others.

Limitations of laws/ regulation

Loophoples enable non-compliance. In practice, offenders may never be caught as inspections may be too few or too lax. For instance, with an increase in the number of prohibited areas, NEA does not have the manpower to deploy officers at every area at all times to ensure that smoking does not occur at all. As such, smoking can still occur which will lead to a rise in second hand smoke and negative health effects such as lung cancer.

Also, it is administratively costly as officials need to be hired to do their routine checks to reinforce the importance of such legislations and prevent smokers who may try to break the rules.

Legislations on its own is a blunt and arbitrary weapon. They are inefficient as they do not pinpoint and focus on punishing only the main culprits. Once imposed, all will have to abide by the regulations. It lacks incentives for the smokers to reduce the negative externalities of smoking without knowing why such measures are put in place.

Other policies that are in place/ can be proposed in Singapore

●       Tobacco taxation: The current cigarette tax is $0.352 per stick of 1g or below, and an additional $0.352 per stick of 1g for each additional 1g or part thereof.

●       Public education: HPB works with community organisations and organises roadshows with Quit Advisors on-site to provide advice to both smokers and nonsmokers. Eg: the annual month-long smoking control campaign, held in conjunction with World No Tobacco Day on 31st May, Chronic Obstructive Lung Disease (COLD) campaign held in May 2008 and the hard hitting Oral Cancer campaign, which was adapted from Australia, in 2007.

●       Partnerships: HPB trains pharmacists, General Practitioners, optometrists and dentists to provide opportunistic smoking cessation advice to patients. Capacity building for smoking cessation counselling is conducted through various training courses such as the Certification for Quit Smoking Consultants (CQSC) Program, launched in 2005. The CQSC course aims to enhance and maintain therapy standards among HPB s service providers and healthcare partners.

Conclusion

Hence, in order to effectively reduce the consumption of smoking in Singapore, the Singapore government will need to make use of  a combination of short run and long run policies. The short run policies which includes the taxes and legislation will serve as a deterrence to prevent the worsening of cigarettes take up rates before the long term effect of education sets in where people gain awareness of the harm smoking will do to them.