Tuesday 23 August 2016 4:30 pm

Economics holds the smoking gun for why e-cigarettes shouldn’t be discouraged

Smoking and other tobacco use is not a disease, it is a consumption decision. So attempts to understand it through the lens of medicine, rather than that of welfare economics (the science of consumer preferences, choice, and welfare), create confusion, absurd claims, and bad public policy.

These errors are particularly harmful in discussions about low risk alternatives to smoking, part of what is known as “tobacco harm reduction”. The alternatives, including e-cigarettes and smokeless tobacco, have such low risk that the health benefits of switching are basically the same as for quitting entirely. Unfortunately, useful discussion about this promising option is hobbled by a lack of basic economic analysis.

There is a heated debate, for example, about the appropriate level of “sin taxes” to impose on e-cigarettes. As shown in my new Institute of Economic Affairs discussion paper (Understanding the basic economics of tobacco harm reduction), a bit of economic analysis makes the right answer clear: zero.

This is true whatever the tax rate on cigarettes, and whether the goal is to reduce health risks or to make people better off more generally. Increasing the purchase price will discourage non-users from buying e-cigarettes and deter smokers from switching. E-cigarettes may not be entirely without risk, but even if every single non-smoker started using them, the total health impact would be less than the reduction in risk among the smokers who switch.

Read more: How the EU has pushed e-cigarettes into the dark

The economics also shows that, for most smokers, switching to a low risk alternative is a better choice than quitting entirely. We do not know how many smokers will continue to prefer smoking to e-cigarettes and other alternatives despite the health risks, but almost every smoker whose welfare would be improved by quitting would be made better off still by switching. Switching provides most of the benefits of quitting entirely (avoiding the health risks of smoking) while keeping many of the benefits the individual derives from smoking.

It is often suggested that the only benefit of switching comes from the health risk reduction among smokers who would not choose to become abstinent, but might prefer switching to smoking. That is certainly a major benefit, but it ignores the additional benefits of using the alternative products rather than becoming abstinent.

For those who like to consume nicotine or enjoy other aspects of using tobacco products, this is extremely important. Thus, if the goal of public policy is really to make people better off, anti-smoking policies that encourage abstinence above all, with switching offered only as an inferior second choice, are backward and impossible to justify.

Read more: Vaping industry body seeks government meeting to discuss law change

The lessons from economics are not all good for advocates of low risk alternatives, however. Anti-tobacco activists like to suggest that any new tobacco product use, no matter how low risk, is a kind of existential evil that must be stamped out. E-cigarette advocates often respond not by disputing the premise but by claiming that e-cigarettes will not increase the number of nicotine users but merely displace smoking.

Simple economics tells us otherwise: lower the cost of consuming a product people like (such as by lowering the health costs of consuming nicotine) and more people will consume it. From an economic perspective this is a benefit not a cost, since anyone freely choosing to use a product must be doing so because it offers net benefits. It is not controversial to observe that some people rationally avoid smoking because of the health costs, but this is exactly the same as saying they would prefer to smoke or use some similar product if the health costs were absent. Tobacco is a very popular drug even in its high risk form, so it obviously produces a lot of benefit for many people.

Read more: Tobacco companies remain an addiction for stock market investors

It is remarkable how many controversies and misperceptions about tobacco harm reduction can be resolved with a simple economic analysis of this fundamentally economic phenomenon. Consumer welfare can only be understood from the perspective of economics.

The economic science cannot tell us the medical implications of these phenomena, of course, but the health science cannot tell us their implications for choices, preferences and welfare. Drawing conclusions about public policy based merely on health science will almost always lead to bad policies.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.