Published in Insights, The New Zealand Initiative’s newsletter, 5 October 2012

A disclosure: I have never smoked a cigarette in my life. Indeed, I abhor the smell of tobacco and pestered my parents into giving up smoking when I was child. Smoking is one of the unhealthiest habits around.

Having said all that, the populist crusade against the tobacco industry is irritating. Not because I necessarily disagree with promoting healthier lifestyles (although the role and extent of government involvement in this project needs to be discussed). No, my problem with anti-tobacco policies is that they are often driven by bad economics.

The latest issue of Economic Papers, the policy journal of the Economic Society of Australia, features an article by Harry Clarke and David Prentice discussing whether plain-packaging rules will reduce cigarette consumption.

‘Plain packaging’ is a bit of a misnomer. Cigarette packs are not plain under the new Australian rules but display graphic health warnings. ‘Dissuasive packaging’ is a better description. Other countries, including New Zealand, are observing this experiment with interest and may copy it.

Given that plain packing effectively stops all point-of-sale promotion and instead encourages health awareness, the question whether this policy reduces cigarette consumption should be a no-brainer. Or is it?

As Clarke and Prentice’s article points out, restricting advertising could have the unintended consequence of reducing brand power, thereby increasing competition and reducing prices. It could also encourage a black market of counterfeits and the sale of unbranded cigarettes. This might reduce prices – and increase sales – although we cannot predict to what extent.

It is hard to foresee which effect will be stronger: a reduced demand from plain packaging or an increased demand from the policy’s unintended effects on price. Clarke and Prentice believe an increase in cigarette consumption is an unlikely net effect but do not rule it out.

To ensure tobacco consumption falls, they argue for any unintended increases in demand to be offset by a higher tobacco excise, greater efforts to detect counterfeit cigarettes, and complex, unattractive packaging designs that make it more difficult to counterfeit plain-packaged cigarettes.

A messy policy that potentially needs a string of further interventions to achieve its goals!

If the intention is to reduce smoking, why not ban it altogether? Or is the government itself addicted to tobacco taxes and doesn’t want to reduce consumption too much?