Mostly Harmless Regulation? Electronic Cigarettes, Public Policy, and Consumer Welfare

Summary of Study

Bottom line: Potential policies like strong warning labels and e-cigarette taxes that further discourage use of e-cigarettes could move consumers away from e-cigarettes, resulting in consumer welfare losses. If proper messaging about e-cigarettes' relative safety could be spread more broadly through an information campaign, misperceptions about e-cigarettes would fall and consumer welfare would rise.

Electronic cigarettes are a far less harmful alternative to combustible cigarettes. Yet consumers overestimate the relative risks of e-cigarettes. Compared with standard cost-benefit analyses, this study finds far higher costs of policies that discourage e-cigarette use.

The study estimates that if the FDA were to adopt stronger warning labels, the fraction of consumers who choose e-cigarettes would decrease to 13 percent. Flavors increase the average utility from e-cigarettes, whereas the strong warning label and higher prices decrease their average utility. Strong warning labels and e-cigarette taxes would significantly reduce the number of e-cigarette users.

If each of the 36.5 million adult smokers in the United States makes a tobacco product choice once per week, behavioral welfare analysis estimates that a ban of e-cigarettes (the most extreme regulatory outcome) imposes a welfare cost of $1.9 billion.

Conversely, an e-cigarette subsidy or an information campaign to reduce optimization errors could help align actual choices with the choices that maximize experienced utility. Currently, the CDC mentions on its website that although e-cigarettes are not safe for people that do not use tobacco products currently, they "do have the potential to benefit adult smokers who are not pregnant if used as a complete substitute for regular cigarettes and other smoked tobacco products."

If this messaging could be spread more broadly through an information campaign and reduce risk perception errors, it would yield large consumer welfare gains. Correcting misconceptions about e-cigarette bias has significant potential, but accomplishing this feat will be difficult. 

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