Wednesday, March 24, 2010

The economics of smoking

Indonesian media is now discussing the Muhammadiyah's fatwa (decree) to categorize smoking or cigarrette as illegitimate (I am not sure if it is the correct word to use, but the original arabic word is "haram"). And the issue is snowballing that they try to pressure the government to ban cigarette, and treat them equally as other prohibited addictive substance like coccaine.

I would not comment about Muhammadiyah's interpretation of Koran in regards of smoking. But, I am more interested to spin things around from economics perspective.

Smoking is an activity that everybody would agree causing problem, everything from pollution, health problem even causing harm on those who don't smoke. The economist call this negative externalities ( cost that imposed to society outside of the transacting parties). The conventional wisdom to solve the problem is to tax the activity. If the tax is as much as the cost imposed to society than everybody should be happy (think about it as a fair compensation). In fact, from the discussion on tv, I heard that cigarrette industries and the smokers are attributed for about 60 trillion rupiahs of the national income (I don't know whether the number is true).

Then, is 60 trillion rupiahs not enough to atone for the smokers' and cigarette industries' "sin"?

The dilemma is if the government increase the tax for the tobacco industries, it will have a negative domino effect. It is a big tree that its roots are feeding many other small industries. The big bosses might still survive with less profit, but the factory workers and tobacco farmers will pay the biggest cost. The unemployment rate will definitely rise.

So there has to be a way to keep the market demand for smoking the same to protect the industries, while the problems could be reduced or at least to be localized (I will explain later what I meant by localizing the problem).

I have a proposal to solve the problem. It might not be applicable for Indonesia, but seems to be feasible in more technologically advanced countries.

First of all, there should be no cigarrette pack being sold, it has to be in singles, so it couldn't be shared. Either the buyer smokes it or he let it go for another person.

All the transaction is done through vending machine.

For every smokers, they have to apply for "smoking card", it is like a credit card to store the information of the card holder's name and the number of cigarrette bought.

Let's say we allow a person to have only 3 cigarrettes per day, then for every transaction after the third, the price should increase exponentially to penalize their behavior. The number will be reset to zero every month.

The smokers can sell their cards to other people. So, eventually the number of people smoking will be less, but the number of cigarrettes demand would not significantly affected since the "right to smoke" is transferrable.

Thus, only those who really really want to smoke and really really have money are able to smoke a lot, and the rest will be better off if they sell their cards to the heavy smokers. My theory is one person smoking 100 cigarretes per day is way better than 100 people smoking 1 cigarrette per day. It means the chances that we meet a smoker is reduced significantly, but once we find one, we bet that the person will smoke for the whole day. It is a lot easier to avoid that one person smoking for the whole day rather than avoiding 100 people smoking for couple minutes. It is also easier to anticipate the problem. Let's say that one person spends a lot of his time in one room, then we only need to install air cleaner machine in that one room, rather than to install it in every room to sanitize the air as a result of many people smoking. If my intuition is correct, there should also be less second-hand smokers as the result of localizing the smoking problem.

Of course, the government should be able to control the number of "smoking card" circulating, otherwise we would not be able to localize the problem.

The hardest part is always to find the "efficient" amount of cigarrette allowed per day per person.

Well, again, it is just a crazy idea.