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
(No Transcript)