The economic rationale for intervention in the tobacco market
Prabhat Jha, Philip Musgrove, Frank J. Chaloupka,
and Ayda Yurekli
Economic theory starts with the assumption that a consumer usually knows what is best for him or herself—the notion of ‘consumer sovereignty’. The theory also assumes that privately-determined consumption choices, including the decision whether to consume a particular product at all within a free competitive market, will most effi- ciently allocate society’s scarce resources. Within this framework, economic theory holds that if smokers consume tobacco with full information about its health conse- quences and addictive potential, and bear all costs and benefits of their choice them- selves, there is no justification, on the grounds of inefficiency, for governments to inter- fere. However, in practice, the market for tobacco is characterized by three specific ‘market failures’—that is, features that result in economic inefficiencies and that may therefore justify public intervention. First, there is an ‘information failure’ about the health risks of smoking: some consumers do not know the risks, and, even where con- sumers are informed, they may not appreciate the scale of those risks or apply the knowledge to themselves. Second, there is an information failure about the addictive