Comment: a Theoretical Framework for Analyzing Social Costs of the Tobacco Program

We commend Johnson and McManus on their creased to the full cost equilibrium. Given the article, which presents a theoretical framework estimate of supply elasticity (.45) and the asfor analyzing social costs of the tobacco program sumption that *S and *S' have the same slopes, and an application of that framework to current these equilibrium points were used to calculate policy issues.' However, while we basically second points on *S and *S'.4 From the two agree with their approach in quantification of points on each curve and the assumption of linear "net reduction in social costs" (given their asequations in the relevant range, equations for *D, sumptions), we perceive related matters that de*S, and *S' were derived.5 With the use of these serve further discussion. equations and quantities for *Qo, *Qi, and *Q2, Johnson and McManus apparently recognize the social cost areas in Johnson and McManus' that, except under circumstances in which markFigure 1 were estimated by integrating the funcups are a fixed percentage of raw product prices, tions over the relevant intervals. The integral farm-level elasticity will be more inelastic than equations and values (rounded to nearest thouretail elasticity. However, they do not appear to sand) were as follows: recognize that the magnitude of the difference will be mainly a function of marketing spreads, Public Costs and that a derived demand approach can be r *Q1 .Q utilized to reach empirically derived estimates of (1) AFHC *S'dQ -J *SdQ elasticity of demand for tobacco at the farm Q2 Q2 level. Their assumed value for farm-level de= $39,240,000 mand elasticity (-.6) was presumably based upon their reported range of demand elasticity estimates for cigarettes of -. 3 (Sackrin, p. 86) to Reduction in Public Costs -1.5 (Maier, p. 703). Marketing spreads for tor *Q1 *Q1 bacco are substantial and largely fixed (Tobacco (2) BGHC = *S'dQ *SdQ Tax Council, p. viii; USDA, p. 98). This would *Qo Q necessarily imply a farm-level demand elasticity = $17,836,000 much more inelastic than assumed by Johnson and McManus. Their assumed elasticity was also notably less inelastic than that reported by SutProducer-Consumer Surplus Loss ton.2 r'Q, *Q In order to demonstrate the impact that an al(3) BCE = *DdQ *SdQ ternative farm-level elasticity might have on *Qo *Q Johnson and McManus' analysis, we assumed a = $4,057,000 farm-level demand elasticity of -. 05. Given this value, if tobacco prices dropped 25 percent (to the postulated competitive market equilibrium), Net Reduction in Social Costs the calculated point on *D would be *P1 = .8445, *Q1 *Qj = 2,160,861.30.3 With the same assump(4) CEGH = *S'dQ *DdQ tions, the calculated point on *D would be *P2 = Qo Qo 1.4638, *Q2 = 2,102,171.24 when price is in= $13,779,000