The purpose of this paper is to demonstrate that the externality that arises from environmental tobacco smoke damage is no ordinary externality. Apart from acting to the detriment of passive smokers, tobacco smoking also affects the survival probabilities of smokers. Incorporating this into its analysis, this paper evaluates the damage caused by smoking, the appropriate design of public health policies and tax policies targeted at reducing tobacco‐related externalities.
By mathematically characterising how smoking impacts smokers and non‐smokers differently, the paper determines smokers' and non‐smokers' lifetime utility, enabling one to evaluate the impact of both health interventions and tax policies.
The paper shows that treatment as well as research and development leading to life‐prolonging health outcomes for smokers are generally oversupplied. The tax recommendations, however, are far from straightforward. Indeed, although not universally the case, it may be optimal to subsidise tobacco usage. The paper also discusses the separating conditions necessary for cigarette taxation to fall or rise with time.
It follows from the paper that ignoring the effect that smoking has on smokers' own life expectancy may lead to erroneous theoretical results and misguided policy recommendations.
The paper seeks to rectify the omission that smoking is somewhat different from other externalities. It develops a model where smoking results in both self‐harm and harm to others, enabling one to demonstrate that there is more to the theoretical study of this externality than is currently acknowledged in the literature.
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