Executive Summary Introduction The smoking epidemic has become a matter of world-wide concern. Many individual countries are engaged in energetic public policies designed to minimise the social impact of smoking and the World Health Organisation views smoking as one of the greatest world health problems. The objective of this publication is to apply economic analysis issues in order to provide the reader with a reasoned and balanced view of the economics of smoking. In particular, it is intended to provide to the governments of the Pacific Islands a sound economic basis for the development of rational public policies towards smoking. Smoking Cost and Public Health In most countries the resources devoted to health care are increasing and smoking-caused diseases are a major reason for this increase. The emphasis of public health policies tends to be strongly on curative care. Less emphasis is placed on preventive programmes, although these can make a major draw on health education strategies and various economic strategies. These types of strategies are more effective when in combination rather than individually. Types of Smoking Costs The economist's definition of cost uses the concept of opportunity cost - the value of the resource in its best alternative use. The total costs of smoking to the community as a whole (social costs) can be split up into the costs borne by the smokers themselves (private costs) and the costs borne by the rest of the community (external costs). Thus: Social cost = private cost + external cost Total costs can also be divided into tangible costs (resource costs) and intangible costs (for example, pain, suffering and loss of life). In examining the total costs of smoking the concept of marginal cost should be utilised. This is the change in total community costs attributable to smoking, taking into account both increases and decreases. It is important to distinguish between real costs and pecuniary costs. Real costs represent a subtraction from community welfare. Pecuniary costs borne by some people are exactly matched by pecuniary benefits received by others, so that there is no change in total community welfare. There has, however, been a redistribution of that welfare. To count both real and pecuniary costs would involve double counting. Budgetary costs are the costs of smoking which are borne by the government sector. They may be real or pecuniary. The Social Cost of Smoking in Detail This section describes in more detail the costs of smoking to the community. The major categories of tangible costs are health care, production losses, welfare provision, fires and accidents, pollution and litter and health research and public health education. Intangible costs consist of loss of life, and pain and suffering. The Budgetary Impact of Tobacco Use Smoking affects government budgets, by changing the levels of both public expenditures and tax revenues. There will be evident expenditure increases, particularly on health services, but there will also be some, smaller, expenditure reductions resulting from the premature deaths of smokers. In addition to tax revenue increases there will also be some, usually smaller, revenue reductions attributable to smoking. They result from the declines in income and consumption tax revenues arising from the premature mortality of smokers. The budgetary impact of smoking does not indicate the impact of smoking on the community as a whole, merely on governments. From the point of view of the community as a whole, tobacco tax revenue is a pecuniary, not a real, benefit. An important question is whether the tax revenue from smokers covers the external costs of smoking (that is, the costs borne by the rest of the community). This is a more important issue than whether tobacco tax revenues exceed tobacco-related public expenditures. Who Bears the Cost of Tobacco Use? Various groups in the community in addition to the smokers themselves bear the costs of smoking. These other groups are non-smokers, business and government. Business interests bear a very significant proportion of smoking costs through absenteeism and lower workplace productivity. Developing countries can expect to face much higher levels of smoking-related public expenditures in the future. Estimating the Social Costs of Smoking There are two broad approaches to estimating the social costs of smoking - the human capital and demographic methods. The two approaches are complementary rather than competitive since they present the cost information in different ways. Both rely upon knowledge about the causal links between tobacco consumption, on the one hand, and mortality and morbidity, on the other. If these physical links can be quantified it is usually possible to estimate the relevant smoking costs. A considerable amount of such epidemiological information exists, although it very largely has been produced for developed rather than developing countries. Smoking cost studies also draw on such information as national accounts data and budgetary workforce statistics. It should be possible to produce smoking cost estimates for most developing nations. Future Smoking Cost Trends in Developing Countries While tobacco consumption in developed countries declines, it continues to increase in developing countries. This will lead to very substantial future increases in the social costs of smoking, and particularly in the public expenditure costs. Effective tobacco control policies should be implemented as early as possible in order to minimise future smoking costs. Economic Controversies Concerning Smoking This section discusses various economic issues which arise in the discussion of the advantages and disadvantages of smoking. The conclusions drawn are that: The benefits of smoking to smokers are far outweighed by its social costs. Only if smokers are fully informed about the effects of smoking, are rational in acting on this information and bear all their health costs themselves will the benefits to them of smoking exceed its social costs. These conditions are very strict and few smokers would meet them. The assertion that the tobacco industry generates substantial employment, output and income relies crucially upon two implicit assumptions. These are : If smokers ceased smoking they would not spend the money elsewhere; The resources used in the tobacco industry have no alternative uses. Both assumptions are unrealistic. It is doubtful if the tobacco industry creates more income and employment than would the alternative uses for the resources. It might quite possibly create less. It has been suggested that increasing tobacco taxes discriminates against the poor implies that the appropriate public policy would be to reduce tobacco taxes, which would have highly damaging effects, not least among the poor. It would also impose substantial costs on the rest of the community. In very few circumstances doe the tobacco industry create balance of payments benefits for developing nations. Reducing tobacco consumption will almost certainly lead to a balance of payments improvement. The lifetime health costs of smokers are very probably higher than those of non-smokers, even though smokers have significantly lower life expectancy, because smoking-related health costs are so high. The arguments in favour of restrictions on tobacco advertising and sponsorship are very strong. The Economic Impact of Reduced Smoking in the Pacific Islands This section reviews the probably economic impact of reduced smoking prevalence and tobacco consumption on selected Pacific islands. For all Pacific Island nations under consideration, a reduction in tobacco consumption would very probably produce a small increase in employment. This would be true even when tobacco leaf is grown in that country, given that alternative cash crops are likely to be available. There would be an improvement in the balance of payments on current account, mainly as a result of a reduction in tobacco imports. Government budgetary positions will improve as a result of a decline in health care costs and, if higher tobacco taxes are implemented, an increase in tax revenue. Policy Implications of the Social Costs of Smoking The high and increasing costs of smoking indicate the need for effective public policies to combat the smoking epidemic. The most important component of such policies should be high tobacco taxes, which will both reduce tobacco demand and provide the revenues to fund other anti-smoking strategies. These strategies include bans on tobacco promotion and on tobacco sales to minors, or the use of tobacco tax rates related to tar levels, public health education programmes and the creation for smoke-free workplaces and public areas. These policies will yield substantial health and economic benefits to government, business and individual members of the community.[