Consumer Surplus in the FDA’s Tobacco Regulations
© Dreamstime.com

Policy Study

Consumer Surplus in the FDA’s Tobacco Regulations

The forthcoming cost-benefit analyses of the FDA’s proposals for nicotine reduction in tobacco and for banning flavors in e-cigarettes must follow standard economic methodology and not assume away part of the consumer surplus.

Cost-benefit analyses (within Regulatory Impact Assessments) are required for significant federal regulations, including for the Food and Drug Administration (FDA) upcoming regulations on nicotine reduction and flavor bans in tobacco products and e-cigarettes; these cost-benefit analyses should be done correctly. 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. Children, by definition, are not adults, and cannot properly be said to have a consumer surplus; then, adults are not children and should not be treated like children in cost-benefit analyses.

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. Without incorporating the full consumer surplus, cost-benefit analysis risks becoming a mere rubber stamp for government proposals. Moreover, 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.

Cost-benefit analysis is not a magic bullet, but it is still a useful requirement if we keep in mind the limitations of the method. Since it is, at any rate, required by federal law, the forthcoming cost-benefit analyses of the FDA’s proposals for nicotine reduction in tobacco and for banning flavors in e-cigarettes must follow standard economic methodology and not assume away part of the consumer surplus.

The presumption of individual liberty and consumer sovereignty that are already implicit in a standard cost-benefit analysis should be reaffirmed and reinforced. 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 preferences and values. 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. More precisely, two recommendations follow from the analysis of this paper.

  1. 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. Any divergence from this recommendation must be accompanied by a detailed explanation of why the trade-offs between risk and subjective benefits should be made, not by each individual, but by government experts or other political processes. This is the object of a second recommendation:
  2. 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.

Full Study: Consumer Surplus in the FDA’s Tobacco Regulations With Applications to Nicotine Reduction and E-Cigarette Flavors

Pierre Lemieux is an economist affiliated with the Department of Management Sciences at the University of Quebec in Outaouais.