Government Policies to Correct the Market Failure from Smoking, and Whether Change Is Needed

Question

Recently, Singapore raised tobacco tax by 10 per cent to stem smoking. The Health Promotion Board is also launching its fourth “I Quit” campaign, which encourages smokers to stop smoking for 28 days. All these come on top of existing regulations on health warnings on cigarette packaging, and the ban of smoking in certain public places. (NEA website and Straits Times, May 2014)

Discuss the reasons for the Singapore government’s choice of policies in correcting market failure that results from smoking, and whether there is a need for change. [25]

Answer

Thesis. Smoking is a classic demerit good: its consumption generates two distinct sources of market failure — a negative consumption externality and imperfect information. Because the problem is multi-faceted, no single instrument can correct it, and the government deploys a complementary mix of taxation, education, packaging regulation and a partial ban. This essay argues that each policy is chosen for how it targets a particular root of the failure, that the policies reinforce one another, and that on balance the existing range is broadly adequate — with scope for refinement rather than wholesale change.

The market failure from smoking. First, smoking imposes a negative consumption externality. Each cigarette consumed inflicts an unpriced, uncompensated third-party cost — respiratory illness in those exposed to second-hand smoke, and the wider healthcare and productivity costs society bears. Because this external cost is not internalised by the smoker, the marginal social cost of cigarettes lies above the marginal private cost, so the free market over-consumes relative to the social optimum and generates a deadweight welfare loss from allocative inefficiency.

Second, smoking is compounded by imperfect information. Smokers systematically underestimate the private health costs of smoking to themselves — addiction, cancer risk, reduced life expectancy. Their perceived private marginal cost therefore lies below the actual private marginal cost, so they consume beyond the level they would choose with full information. This perceived-versus-actual divergence is an individual cost-benefit failure, not a market externality diagram, so it is analysed in prose: bridging the gap between perceived and actual private cost is itself a route to reducing over-consumption towards the informed optimum.

Taxation — chosen as a market-based instrument that internalises the external cost. A per-unit tobacco tax raises the private cost of each cigarette so that the smoker internalises the marginal external cost, deciding how much to smoke in light of the higher price and thereby moving consumption towards Qs. The government favours taxation because it is a finer instrument than a blanket ban — heavier smokers are taxed in proportion to their consumption, whereas a ban treats all smokers alike — and because enforcement is straightforward, the tax being collected at the point of purchase. Its limitations, however, are real. The marginal external cost is hard to quantify in monetary terms, so the tax may be set too high or too low and Qs missed. More importantly, the addictive nature of smoking makes demand price-inelastic, so a 10 per cent rise removes only a small quantity; given the general affluence of Singapore’s smokers, the tax alone is likely less effective than other instruments at curbing the habit. Taxation also does not directly correct the information failure — though it still delivers the desired reduction in quantity.

Education — chosen to target the root of the information failure. Campaigns such as the Health Promotion Board’s “I Quit” 28-day programme attack the problem at source, raising smokers’ perception of the private health costs they bear and so shifting perceived private cost towards its true level, reducing consumption. Education is the policy uniquely suited to imperfect information, and innovative campaigns using real-life testimonies can be persuasive. Its weakness is that, against an addictive good, fuller awareness of the harm is by itself insufficient to make many smokers quit; mindset change is slow and reversible, so education works only over a long horizon.

Regulation (graphic packaging warnings) — chosen to reinforce the information correction at the point of sale. Mandatory images of diseased lungs or harm to foetuses act as a psychological deterrent each time cigarettes are purchased, again narrowing the perceived-actual cost gap. The visual impact is an effective regular reminder, especially for health-conscious or pregnant smokers. The limitation is habituation: smokers may grow desensitised to the images over time, blunting the long-run effect.

Partial ban on smoking in public places — chosen to suppress demand and contain the externality where it bites hardest. Banning smoking at bus stops, coffee shops and similar venues reduces the private benefit of smoking — fewer places to smoke lowers demand — pushing consumption nearer Qs, while directly preventing third-party costs at the targeted locations. A partial ban can be aimed precisely at the highest-impact areas. Against this, it is a blunt instrument that does not distinguish heavy from light smokers, and enforcement is a genuine challenge where coffee-shop owners are not empowered to police it. The recent extension of the ban to army camps is instructive: military enforcement is far easier, and since many Singaporean male smokers begin during National Service, this is likely to have a significant effect.

Evaluation — is there a need for change? The reason the government chooses this particular mix is that the policies reinforce one another across both sources of failure. Taxation addresses over-consumption directly; education and graphic warnings attack the information failure at its root; the partial ban prevents third-party costs at selected sites. A government making a rational policy choice weighs not each policy’s limitations in isolation but how the instruments interact to tackle a multi-faceted problem — and on that test the existing range is coherent and broadly adequate. Measures outside the extract, such as raising the minimum smoking age progressively to 21, further limit the societal costs.

This does not mean the policies are beyond improvement. Enforcement of the smoking bans can be tightened, and heavier tobacco taxes and stiffer penalties for flouting regulations can be considered — particularly given inelastic, affluent demand. A reasonable case can also be made that change is needed at the margin, provided it is substantiated. But the stronger judgement is that no single measure could replace the mix: because there are two sources of market failure, the complementary instruments are jointly more effective than any one alone. The government’s continued tightening — most recently the army-camp ban — signals that it recognises smoking as an evolving problem and is, on balance, on the right track. The verdict, therefore, is that the existing policy set should be retained and refined rather than fundamentally changed.