Consumer Surplus in the FDA's Tobacco Regulations: With Applications to Nicotine Reduction and E-Cigarette Flavors
Bottom Line: The presumption of individual liberty and consumer sovereignty that are already implicit in standard cost-benefit analysis should be reaffirmed and reinforced when it comes to regulating e-cigarettes. This implies taking consumer surplus seriously. There is no reason, and certainly no scientific reason, why government officials or their advisers should be allowed to negate the preferences of ordinary people and to favor instead their own vaping preferences and values.
Consumer surplus—how much a consumer values a product or, more precisely, the amount a customer would be willing to pay over and above the price of the good—is a fundamental concept in cost-benefit analysis. The loss of consumer surplus from regulating e-cigarettes must inform any and all public policy on the matter.
Under the pressure of the anti-smoking movement and behavioral economics, the FDA has recently downplayed consumer surplus in the case of tobacco. The arguments of behavioral economists for chopping consumer surplus are not convincing. The justifications for obliterating or reducing consumer surplus are based on cognitive biases and assumptions of individuals’ lack of self-control, but implicitly assume that politicians and government bureaucrats are not subject to the same failings.
Even when science finds evidence of risk in certain activities, the trade-off between probabilistic cost and benefits must, in general, be left to each individual. An adult’s benefits are subjective and cannot be appraised by anybody else. To guard against government’s coercive elitism and paternalism, it is important that the FDA’s cost-benefit analyses related to tobacco and e-cigarette consumption take due account of the loss in consumer surplus caused by bans.
This paper provides two recommendations when it comes to regulating e-cigarettes:
- Cost-benefit analyses of the FDA’s tobacco regulations must provide an estimate of the loss in actual, unmodified consumer surplus, as revealed by smokers’ or vapers’ choices on the market. This loss in consumer surplus must be included in the cost of the proposed regulation.
- If the loss in consumer surplus is not entered at its full value on the cost side of a proposed regulation, the FDA must explain (a) why the implied trade-off between smokers’ risks and benefits is made by the government and not by each individual vaper or smoker; (b) how the government’s political and bureaucratic processes can be trusted to lead to an optimal choice; and (c) why the cognitive biases or lack of self-control of government agents are to be preferred to those of ordinary individuals.
Read the full report here.
