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SmokeFree Laws: Economic Issues

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Michael R. Pakko, Ph.D.* Federal Reserve Bank of St. Louis ... [See also, Phelps (2006) 'The Economic Impact of 100% Smoking Bans' ... – PowerPoint PPT presentation

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Title: SmokeFree Laws: Economic Issues


1
Smoke-Free Laws Economic Issues
  • Michael R. Pakko, Ph.D.
  • Federal Reserve Bank of St. Louis

The views presented here are my own, and do not
represent official positions of the Federal
Reserve Bank of St. Louis or the Federal Reserve
System
2
Smoke-Free Laws An Economists Perspective
  • Michael R. Pakko, Ph.D.
  • Federal Reserve Bank of St. Louis

The views presented here are my own, and do not
represent official positions of the Federal
Reserve Bank of St. Louis or the Federal Reserve
System (or anyone else, for that matter)
3
Prevalence of Smoke-free Laws
  • No smoke-free ordinances existed in the United
    States before 1990.
  • As of November 2006, 2,344 municipalities in the
    United States have local laws in effect that
    restrict where smoking is allowed.
  • Seventeen states and 519 municipalities have
    ordinances that require completely smoke-free
    workplaces, restaurants, and/or bars (but not all
    three).
  • Six states and 162 municipalities require
    completely smoke-free workplaces, restaurants,
    and bars.

Source Americans for Nonsmokers Rights
4
Todays Topic
An Economic Analysis of Smoke-free Laws
  • A (Critical) Review of The Literature
  • Economic Theory and Policy
  • The Role of Government
  • The Market Works!

5
A Review of The Literature
  • The Main Issue


    Public Health vs. Economic Impact
  • Primary battleground
    Restaurants and Bars
  • (bingo halls, billiard parlors, and bowling
    alleys plus hotels and casinos too)

6
A Review of The Literature
Siegels Criteria
  • Use of objective data
  • Inclusion of continuous data before and after ban
  • Statistical methods to control for trends and
    random fluctuations
  • Appropriate control for economic trends

7
Economic Impact Studies (I)
Scollo, Lal et al (2005) Review of the quality
of studies on the economic effects of smoke-free
policies on the hospitality industry
  • (1) Was the study funded by a source clearly
    independent of the tobacco industry?
  • (2) Did the study objectively measure what
    actually happened, or was it based on subjective
    predictions or assessments?
  • (3) Was it published in a peer reviewed journal?
  • Studies Considered 97
  • Economics Journals 1

8
Economic Impact Studies (I)
General Findings and Critiques
  • Research result no statistically significant
    evidence from aggregate data.
  • Conclusion No effect No cost.
  • Example This study provides further evidence
    that workers can be protected from the hazards of
    ETS exposure without adverse consequences for bar
    and restaurant business.
  • Interpretation error failure to reject the null
    hypothesis is presented as conclusive evidence.

9
Economic Impact Studies (I)
Other considerations
  • Analyses ignore economic theory.
  • Early studies utilize limited data sets.
  • Evidence of local (and firm-specific) effects not
    considered.
  • Full costs (e.g. welfare effects, impact on
    profits) not measured.
  • Specification Errors

10
Economic Impact Studies (I)
Other considerations
  • Common Specification errors
  • Omitted variable bias
  • Small sample bias
  • Sample selection bias
  • Out-of-sample extrapolation errors

11
Case Study Maryville, MO
  • June 9, 2003
  • Maryville Clean Indoor Air Act
  • the first such ordinance in Missouri to
    completely prohibit smoking in all restaurants.
  • - Cowen et al. (2004)

12
Maryville Cowan et al. (2004)
no detrimental changes in revenues for eating
and drinking places occurred after the ordinance
took effect... In fact the ordinance may have
been beneficial for this area of business.
13
The Applebees Effect
  • February 2004 Applebees comes to town
  • Things have gone exceptionally well in
    Maryville. Maryville has been one of the busiest
    stores in the country since its opening. We call
    it our crown jewel.
  • - Robert Marshall, VP of Operations, Concorde
    Neighborhood Group
  • (Quoted in the Maryville Daily Forum, February
    8, 2005)

14
The Applebees Effect
15
Maryville, MO Conclusions
  • Smoking ban had no significant effect on total
    bar and restaurant sales in Maryville.
  • Sales increase in 2004 more closely corresponds
    to the opening of the new Applebees in town.
  • The Maryville experience is inapplicable to many
    recent and prospective smoke-free laws.

16
Maryville, MO Conclusions
the first such ordinance in Missouri to
completely prohibit smoking in all restaurants.
  • Small sample 26 observations.
  • Bars exempted (60 rule).
  • Seven establishments exempted by name (including
    3 restaurants).
  • 70 of restaurants were smoke-free already
    (
  • Smoking prevalence
  • Maryville 16.8
  • Missouri 26.4

17
Economic Impact Studies (II)
  • Pakko (forthcoming, Applied Economics)
    No Smoking at the Slot Machines
  • Adams and Cotti (2007, The B.E. Journal of
    Economic Analysis and Policy) The Effect of
    Smoking Bans on Bars and Restaurants An Analysis
    of Changes in Employment
  • Fleck and Hanssen (forthcoming, Economic
    Inquiry) Why Understanding Smoking Bans is
    Important for Estimating Their Effects

18
Economic Impact Studies (II)
  • Pakko (forthcoming, Applied Economics)
    No Smoking at the Slot Machines

See also, Thalheimer and Ali (2006)
Background
  • Mandel, Alamar and Glantz (2005, Tobacco
    Control) Smoke-free law did not effect revenue
    from gaming in Delaware
  • Pakko (2006, Tobacco Control)
    Smoke-free law did effect revenue from
    gaming in Delaware
  • Alamar and Glantz (2006, Tobacco Control)
    Authors response to M. R. Pakko

19
Economic Impact Studies (II)
  • Pakko (forthcoming, Applied Economics)
    No Smoking at the Slot Machines

Seasonally Adjusted Net Proceeds at Delaware
Racinos
Smoke Free Law
20
Economic Impact Studies (II)
  • Pakko (forthcoming, Applied Economics)
    No Smoking at the Slot Machines

Conclusions
  • Revenue losses totaled 15, ranging from 9 to
    16 at individual racinos.
  • Profit losses likely exceeded revenue declines.
  • Pattern of losses corresponded to regional
    competition.
  • Annual revenue losses of 94 million dollars
    correspond to state revenue losses of 33 million
    per year.

21
Economic Impact Studies (II)
  • Adams and Cotti (2007, BE Journal of Economic
    Analysis and Policy) The Effect of Smoking
    Bans on Bars and Restaurants

See also, Phelps (2006) The Economic Impact of
100 Smoking Bans
  • Analysis of nationwide, county-level employment
    data for restaurants and bars.
  • Employment at bars statistically significant
    decline
  • Larger effects in communities with high smoking
    prevalence
  • Employment at restaurants no significant effect
    overall
  • Results differ geographically smoking
    prevalence and weather

22
Economic Impact Studies (II)
  • Fleck and Hanssen (forthcoming, Economic
    Inquiry) Why Understanding Smoking Bans is
    Important for Estimating Their Effects
  • Municipal sales tax revenues for California
    restaurants.
  • Impact of Any ban significant revenue decline
  • Impact of City ban no significant change
  • Impact of State ban significant revenue
    decline
  • BUT - Evidence suggests an endogeneity problem

restaurant sales growth appears to cause
restaurant smoking bans, not vice versa.
23
Economic Theory
  • Analyzing Risk Increasing marginal costs and
    diminishing marginal benefits
  • Revealed Preference Market outcomes reflect
    consumer/worker preferences
  • Market Failure?
  • Externalities
  • Imperfect information
  • Coordination failure
  • Government Intervention?

24
Economic Theory
  • Analyzing Risk

Increasing Marginal Cost and Diminishing Marginal
Benefit
25
Economic Theory
  • Revealed Preference
  • Market outcome reflects consumer/worker
    preferences.
  • If going smoke-free presented potential profits,
    restaurants and bars would do so without
    regulations.
  • A regulation that restricts owners operating
    choices would at best have no effect on
    profitability.
  • BUT - This outcome assumes market efficiency.

26
Economic Theory
  • Is there Market Failure?
  • Externalities (Spillover Effects)
  • Imperfect information
  • Coordination failure

27
Economic Theory
  • Externalities (Spillover Effects)
  • Definition cost or benefit that is borne or
    received by third parties.
  • Market Failure Externalities only imply market
    failure when they are not reflected in
    prices/costs.
  • Market Structure Monopolistic Competition
    Bar and restaurant owners compete based on
    quality differences in attributes like name,
    location, food, and ambiance. This is the source
    of their profits (rents).
  • Proposition When property rights are clearly
    defined, profit maximization leads bar and
    restaurant owners to internalize the
    externalities of secondhand smoke.

28
Economic Theory
  • Externalities (Spillover Effects)

How the Market Works
  • Customers who do not want to be around secondhand
    smoke will tend not to patronize places that
    allow smoking.
  • Workers who do not want to work around secondhand
    smoke will tend to seek employment elsewhere.
  • Business owners will be driven by the profit
    motive to accommodate their customers and
    compensate their employees.
  • Profits, prices and wages reflect the costs of
    externalities.
  • The market provides a menu of opportunities.

29
Economic Theory
  • Imperfect Information
  • Two potential problems
  • Consumers/workers underestimate risks
  • Businesses incorrectly assess costs/benefits
  • Policy Solution Provide Information
  • Coordination Failure Competition
    prevents coordinated action. Profit
    opportunities (and public benefits) go
    unexploited.

30
Governments Role
  • What Government Action?
  • Market Solution Protect
    Property Rights
  • Some Government Intervention Provide
    Information
  • 100 Ban Enforce
    prohibitions

31
Governments Role
  • Do 100 Smoking Bans Go Too Far?
  • Non-smoking Hotel Rooms the devil is in the
    details.
  • Prohibition of Smoking Lounges is this
    necessary or desirable?
  • Restrictions on Restaurants, Bars, Private Clubs,
    etc. (privately owned)
  • The property-rights issue again

32
Governments Role
  • Hypothetical Case

33
Governments Role
  • Hypothetical Case

34
Governments Role
  • Hypothetical Case

35
The Market Works!
  • As more people become concerned about secondhand
    smoke, the market is working to provide
    smoke-free environments.
  • Government intervention is unnecessary. It
    represents a superfluous and costly restriction
    on consumer choice and private property rights.
  • Smoking bans restrict business owners freedom to
    choose whether to allow smoking and limit their
    ability to find a market niche.

36
The Market Works!
May 14, 2007
  • Nearly 300 eating establishments in Erie County
    have gone smoke-free. That's four times the
    number since 2001.
  • "These places stay in business by meeting the
    needs of their customers," said Patrick Conway,
    chief executive of the Pennsylvania Restaurant
    Association. "More and more, people don't like
    smoke, and the restaurants have responded."

37
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