On the Economic Impact of Smoking Bans

This paper comprises two related essays that consider the economic impact of government ordinances to ban smoking in all public places, including privately owned establishments. It is hoped that this analysis will contribute to the public discourse about smoke-free laws that are being considered in many communities around the District. Part I: “Commentary on the Economics of Smoking Bans: Aggregate Effects, Economic Efficiency, and Political Economy” The first essay is a critical evaluation of the literature on the economic effects of smoking bans. By focusing exclusively on aggregate economic impact, many studies tend to overlook the importance of distributional effects. In terms of economic welfare, some consumers and businesses may be better off after a government ban, while others will be worse off. These differential effects reveal inefficiencies that should be considered as economic costs. Distributional effects also account for the political economy of smoking bans: Government proposals pit competing economic interests against one another, igniting controversy and public debate. The political resolution of this conflict often involves ordinances with exemptions for certain types of establishments. The prevalence of these exemptions tends to limit the applicability of many existing studies to the more comprehensive smoking ban proposals that are presently under consideration in many communities. Part II: “A Case Study: The Impact of a Smoking Ban on Restaurant and Bar Sales in Maryville, Missouri” Part II is an empirical analysis of data from Maryville, Missouri—the first city in Missouri to ban smoking in restaurants. An examination the first year of the smoking ban, recently released by the Missouri Department of Health and Senior Services (DHSS), concludes that there were no detrimental effects on Maryville bars and restaurants and that the ban “may have been beneficial for this area of business.” After conducting a more thorough statistical analysis of the data— considering trends, seasonal effects, general economic patterns, and specific features of the Maryville economy—I find no statistically significant effect of the smoking ban on Maryville bar and restaurant sales. The increase in bar and restaurant sales noted in the DHSS study is more closely associated with the opening of a new, popular restaurant chain outlet in Maryville than it is with the smoking prohibition. The Maryville case study serves to illustrate some of the general issues discussed in Part I. *Michael R. Pakko is a Senior Economist at the Federal Reserve Bank of St. Louis. The views expressed in this paper are those of the author and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 2 Part I: Commentary on the Economics of Smoking Bans: Aggregate Effects, Economic Efficiency, and Political Economy In Missouri and across the nation, communities are debating the efficacy of banning smoking in all public places, including privately owned establishments. The policy issues involved are multidimensional, but the public debate is often summarized in terms of public health versus economic impact. Along the economic dimension of this debate, the focus of policymakers is often directed toward considering the aggregate, or overall effects of smoking bans on business in a community. Data on community-wide economic activity is often readily available and it might seem that the overall effect of a public policy on economic activity is the appropriate measure to consider. But it is also important to account for the distributional impact and economic inefficiencies that are often imposed by government intervention the market, particularly in cases where the proposed policy imposes blanket restrictions. These differential effects reveal inefficiencies that should be considered as true economic costs of government smoking bans. Distributional effects also contribute to the political economy of smoking bans, as economic interests clash. The resolution of these conflicts often results in legislation that exempts certain types of businesses from these bans. Such compromises represent a political outcome that reduces the potential inefficiency and welfare losses that might otherwise be imposed by more comprehensive smoking prohibitions. However, the prevalence of these exemptions, in turn, limits the applicability of many studies to the more comprehensive legislation that has been proposed in many communities. A. Aggregate Economic Impact The consensus of the literature on the economic effects of existing smoking regulations is that no statistically significant impact on overall business in a community can be ascertained. 1 Some of the more prominent studies include Huang et al. (1995), Glantz and Smith (1994, 1997), Bartosch and Pope (1999, 2002) Hyland, Cummings and Nauenberg (1999), and Huang et al. (2004). A recent comprehensive survey is provided by Scollo et al. (2003).