The theory suggests that an efficient level of consumption would ensure that the price of cigarettes is such that it takes into consideration the harm inflicted by smoking on society as well as their own welfare . These externalities are considered rather small , but include larger external costs such as increased health and insurance costs and lower workplace productivity . Therefore, the cigarette tax acts as a pigouvian tax and attempts to have smokers internalize the externals costs imposed by their smoking . when determining the net cost to society as a result of smoking. Furthermore, the negative externality is offset by the benefit society derives from the shortened lives of smokers via social security and the earlier deaths of smokers also offsets many of the effects of medical costs (or cost increases) of smoking