Thank you for not smoking.

This activity can be used in a principles of economics, or principles of microeconomics class. It is best that students understand the concept of externalities and how to analyse them with the use of graphs before they begin. Students should also be able to interpret PED and income elasticity of demand. Students should be familiar with the concept of tax incidence and how that depends on the price elasticity of demand (PED) of the good/service. Usually the topics of externalities, elasticities and tax incidence are not taught together so students may need to review those topics before attempting this application. Students should have done an iRAT/tRAT on the concept of externalities, and completed assigned problems on the various solutions and policies aimed to control externalities. This activity will take between 30 – 40 minutes depending upon the size of the class and how long it takes to report out.

Overview

Working in predetermined teams, students will rank, with the help of elasticities, policies aiming to reduce smoking. Students will also need to identify why smoking gives rise to negative externalities. Students must be able to differentiate between personal benefit/cost and social benefit/cost and their difference. Many times students confuse the externality to be the personal cost or benefit, so this is a good exercise to have them differentiate between these two. Students should also use graphs to show the impact of the policies implemented.

Expected Student Learning Outcomes

Be able to analyse externalities with the use of graphs, explain how externalities are reduced via public and private solutions and policies, show the impact of those policies on graphs, and be able to rank policies in terms of their effectiveness. Students should also know how to interpret elasticities and how those can lead to policy recommendations.

Information Given to Students

Negative Externalities: Smoking

Assume that you work as a researcher at your state government. You are currently working on a research project that will lead to policy recommendations for smoking reduction in your state. Through your research you have found that in your state price elasticity of demand for cigarettes is -0.4, and income elasticity of demand is 0.5. According to this information, rank the following policy options in terms of how effective they are in smoking reduction.

a. Impose high taxes on cigarettes.

b. Regulate: make smoking indoors illegal.

c. Give people the right to clean indoor air and allow that right to be traded.

d. Inform people of the negative effects of smoking and let them choose for themselves whether they want to smoke.

All members of your team should be able to defend the solution you have chosen. Moreover, you should be able to provide your answer with graphs that explain why your top ranked option is the most effective.

Context and preparation:

The teacher can use videos to revise externalities and reaffirm the understanding of the idea of externalities. Students should be able to debate the solution they have ranked as first, and discuss its advantages and disadvantages compared to the other solutions. The teacher can randomly choose one person per team to discuss the team's choice, to avoid better performing students from dominating the debate. The students should also be able to identify what are the negative externalities of smoking.

Teams will report out their answer collectively, on submission papers or on the board, depending upon how visual you want the answers to be. Students should be informed that all team-members are expected to actively participate in the discussion. The teacher can circulate the room during the entire team activity to redirect student discussions and clarify the activity or the course material.

Debriefing notes: Firstly, the teacher should ask students to comment on the negative externalities of smoking. Many students think that the externality is the personal cost, for example, bad health of the smoker due to smoking etc. Push them to think how an individual smoking is hurting the society, to try and find examples of the externality.

Many students think that the best way to reduce smoking is through taxation. Push them to think of other solutions by drawing examples from their everyday life. Is smoking allowed in public indoor places? Can people younger than 18 (age varies per country) buy tobacco products? Can they think of an example of anti-smoking campaigns? Here you need to push students to see how often many different types of solutions and policies are implemented at the same time to reach the desired outcome.

After, push them to think of the PED of cigarettes and how that relates to taxes. Demand for cigarettes is inelastic, which means that the decrease in quantity demanded of cigarettes will be lower than the increase in the price of cigarettes due to taxes. Also, given the market nature of cigarettes most of the tax incidence will be borne by consumers. This, coupled with the positive income elasticity of cigarettes, means that low income consumers will be hurt the most by taxation. According to the information given in the exercise, cigarettes are a normal good. How would the quantity demanded of high-income consumers react to high taxes?

If students ranked answer c as the most effective, teachers can shift the discussion on Coase Theorem and why property rights will not work in such a situation. Ask then to imagine themselves entering a pub and wanting to smoke a cigarette. Ask them to imagine that they are on their own and only the bartender is present at the bar (so we have only two people in the bar). The bartender and the student will need to each think how much they value clean air/smoking and transact. Imagine they agree at $10. This means that the bartender values $10 more than he/she values clean air and that the student values a cigarette at least equal to $10. Both parties are currently better off than if smoking was banned indoors, as they can transact. But how does this situation change when the bar is full of people on a Saturday night? This allows us to bring transaction costs into the example.

Another point that can create discussion here is whether self-interest, social norms and moral behaviour would work here. Would informing people of the negative effects of tobacco lead to decrease of tobacco consumption? The conversation here can expand into peoples' rationality and time preference (benefit of smoking now, vs health costs in future) and link to topics of behavioural economics. Also, how will this option compare to taxation in terms of effectiveness?

Students must be able to draw the graph required for this application and discuss the effectiveness of each of the policies/answers and be able to explain why they ranked the options is such order. At the end of the application students should understand that in most cases, governments use a number of policies to control externalities and how elasticities matter for government policy.

Test questions and graded problems/homework tasks.

Any chapter(s) that discuss(es) market failure and externalities as a concept, external costs and benefits, solutions aimed to control externalities such as regulation, taxation, and private solutions such as social norms and moral behaviour, self-interest, and the Coase Theorem. Students should also review chapters on externalities and how PED influences tax incidence.