1.1. Utility and equilibrium

We consider the hyperbolic discounting framework of Laibson (Reference Laibson1997). Consider people having a utility function of the form:

(1) $$\begin{eqnarray}W=U_{t}(a_{t},S_{t};c_{t})+{\it\beta}\mathop{\sum }_{i=1}^{T-t}p_{t+i}(\boldsymbol{a}){\it\delta}^{i}U_{t+i}(a_{t},S_{t};c_{t}),\end{eqnarray}$$

where $W$ is the discounted value of lifetime utility and $U_{t}$ is the per-period utility function. We imagine there are two goods: an addictive good, with current consumption $a_{t}$ , and all other goods $c_{t}$ , where $c_{t}=Y-P_{a}a_{t}$ for constant income $Y$ .Footnote ⁴ $P_{a}$ is the constant real price of the addictive good. $S_{t}$ is the stock of addiction entering period $t$ – typically a weighted average of past consumption. We normalize the weights so that at constant $a$ over time (denoted by $\bar{a}$ ), $\bar{S}=\bar{a}$ ; that is, the value of the existing stock is equal to the flow of annual consumption. $p_{t+i}(\boldsymbol{a})$ is the probability of survival to period $t+i$ . It is conditional on the entire past history of consumption of the addictive good, denoted by $\boldsymbol{a}$ . If only the cumulative stock of smoking matters, $\boldsymbol{a}=S_{t}$ . More generally, smoking may affect health in a different way than it affects addiction.

For ease, we assume that utility is additively separable in the addictive good and all other goods, and that the marginal utility of all other goods is constant. This implies that $U_{t}=v(a_{t},S_{t})+(Y-P_{a}a_{t})$ . We further assume $v=v({\it\alpha}_{1}a_{t}-{\it\alpha}_{2}S_{t})$ , where $v(.)$ is assumed to be concave.Footnote ⁵ ${\it\alpha}_{1}$ measures the extent to which consumption of the addictive or habitual good increases current period utility. ${\it\alpha}_{2}$ reflects withdrawal. It is the extent to which today’s utility is lower if one consumed more of the good in the past, holding current consumption constant.

$v(.)$ may vary with age. Teens may benefit from the rebellious image that smoking conveys, while adults may not. It is possible that ${\it\alpha}_{1}>0$ for teens and ${\it\alpha}_{1}\approx 0$ for adults; this would correspond to a situation where never-smoking adults would derive no pleasure from smoking.

One important case is where ${\it\alpha}_{1}={\it\alpha}_{2}$ . If this is true, there is no steady-state benefit to consuming the addictive good. That is, $v(.,.)$ is the same at any constant $\bar{a}$ , even $\bar{a}=0$ . But there are withdrawal costs associated with moving from a higher $a$ to a lower $a$ , because reducing $a$ below $\bar{S}$ would be utility-reducing. To avoid this withdrawal effect, people may not make the change.

People discount the future in two ways. The first is the standard exponential discount rate, ${\it\delta}$ . To avoid excess notation, we assume that ${\it\delta}=1$ . In addition, some people have a preference for current utility over all future utility, captured in the parameter ${\it\beta}$ . Consumers with ${\it\beta}=1$ apply the same discount between the present and the near future as they would between two adjacent periods in the future. Consumers with ${\it\beta}<1$ apply an extra discount to all future periods relative to the present, so they will continually delay making investments with up-front costs, even if they would agree when thinking about what would best benefit them in the long term that the investment is a good idea. They are commonly referred to as hyperbolic.

Time-inconsistent discounting will lead to suboptimal outcomes. Incomplete information about future consequences of current actions will as well. People may not understand the health costs of the addictive good $(p_{t+i}(\boldsymbol{a}))$ or how addictive the good is $({\it\alpha}_{2})$ . For simplicity, we assume people understand the addictiveness of cigarettes (i.e., perceptions of ${\it\alpha}_{2}$ are accurate) and examine the impact of inadequate understanding of the health cost of smoking – for example, the evidence that people do not appreciate how sick they will be at the end of life. We denote the perception of this variable as $\tilde{p}_{t+i}(\boldsymbol{a})$ .

The individual’s optimal consumption of the addictive good can be found by maximizing utility. This yields the first order condition:

(2) $$\begin{eqnarray}\displaystyle & & \displaystyle \underbrace{{\it\alpha}_{1}v_{t}^{\prime }}_{\text{current consumption benefit}}-\,\underbrace{{\it\alpha}_{2}{\it\beta}\sum \tilde{p}_{t+i}v_{t+i}^{\prime }\frac{d\!S_{t+i}}{da_{t}}}_{\text{future withdrawal cost}}+\underbrace{{\it\beta}\sum U_{t+i}\frac{d\!\tilde{p}_{t+i}}{da_{t}}}_{\text{longevity cost}}\nonumber\\ \displaystyle & & \displaystyle \quad =\underbrace{P_{a}}_{\text{forgone consumption}}.\end{eqnarray}$$

The first term on the left-hand side of equation (2) is the current marginal benefit of consumption. That may involve direct consumption benefits or indirect benefits such as relaxation and weight loss. It also includes health-related quality of life. The second term is the discounted value of the future withdrawal cost that will be caused by consuming more of the addictive good in the current period. These costs arise as people reduce consumption and decay as the future stock of addictive capital declines (i.e., $\frac{dS_{t+i}}{da_{t}}$ declines with increasing $i$ ). The third term is the mortality impact – the reduction in lifetime utility from premature mortality due to smoking in period $t$ . Note that $\frac{d\tilde{p}_{t+i}}{da_{t}}<0$ , so this term is negative. At the optimum, the consumer will trade off the sum of these impacts against the marginal utility of other consumption forgone, which is given by $P_{a}$ .

Figure 1 shows a graphical version of this equilibrium. As is the norm, we include the monetary price and health costs (the third and fourth terms) as costs, and the consumption benefits net of withdrawal (the first two terms) as the value to the individual, though no practical difference in results depends on whether a health harm is termed a cost or a negative benefit.

Figure 1 Equilibrium with two types of consumers. Type I consumers are rational and fully informed. Type II consumers are either imperfectly informed, in which case they overconsume because perceived costs are low ( $\hat{Q}_{\text{II}}$ ), or have difficulty constraining consumption ( $Q_{\text{II}}$ ).

Because withdrawal costs vary with past consumption, so too will the value of current consumption. We start by drawing the short-run demand curve corresponding to the initial addictive stock. We return to the dynamics below.

This model can be applied for both existing users of the good and for potential initiators, although the empirical implementation differs between the two cases. Considering existing users first, we delineate two types of individuals: type I consumers who are fully rational and fully informed ( ${\it\beta}=1$ and $\tilde{p}_{t+i}=p_{t+i}$ ); and type II consumers who have time-inconsistent preferences ( ${\it\beta}<1$ ). The demand curves of the two types of consumers are shown by $D_{\text{I}}$ and $D_{\text{II}}$ ; at any price, $D_{\text{II}}>D_{\text{I}}$ because of the additional weight that type II consumers place on short-term costs and benefits, and thus their overconsumption relative to rationally discounted targets.

There are two prices to consumption: the health cost, which we denote as $P_{h}$ , and the market price of the good, $P_{a}$ . Given these prices, consumers from the two groups will choose to consume $Q_{\text{I}}$ and $Q_{\text{II}}$ , respectively. There is a welfare loss for type II consumers because they overconsume the addictive good.

$Q_{\text{I}}$ and $Q_{\text{II}}$ would also differ if type II individuals misperceive the full health cost to using the addictive or habitual good $(\tilde{p}_{t+i}\neq p_{t+i})$ . For example, if type II consumers do not perceive any health cost to using the good, the equilibrium will be along the common demand curve $(D_{\text{I}})$ , but where their valuation of the good is equal to the monetary price of the good, $P_{a}$ . The result is shown as $\hat{Q}_{\text{II}}$ , which again is above $Q_{\text{I}}$ .

1.2. Types of regulations

Several types of regulations could be enacted in such a market. Some regulations change the information available to consumers (as with ingredient labels) or the salience of the information (as with graphic warning labels for cigarettes). Other regulations require producers to change how they manufacture, distribute, or market their good, usually aiming to better satisfy public health or safety concerns. If such a change increases producers’ costs, the higher costs may be passed through to consumers in the form of higher prices. Still other regulations change how products are marketed, distributed, or sold, for example, limiting vending machine sales of cigarettes. Finally, some regulations may require companies to alter or eliminate product attributes that people value, such as flavors or packaging, perhaps in the interest of reducing smoking initiation by youth.

Economically, these regulatory activities fit into two groups: those that affect information or its salience, and those that affect prices of the good. Explicit price increases might result from required manufacturing changes; implicit price increases are those resulting from higher search costs or reduced pleasure per unit of the good. We discuss the impact of information- and price-based regulations below, and in each case differentiate between the impact of regulations on existing users and on potential new users.

1.3. The welfare consequences of regulations

We start with regulations that increase the amount or salience of information about health effects. Information about some of the major harms of smoking, such as risks of lung cancer and heart disease, has been widely available for some time, making it tempting to ignore this issue for smoking. However, it is not clear that current regulations can be interpreted as occurring in a context of full information, given limits on people’s ability to keep up with an evolving subject. Further, the salience of the information varies over time.Footnote ⁶

Figure 2 shows the welfare impacts of an information-based regulation. We consider a situation where type II consumers are fully informed about the harms of the good, but have difficulty cutting back to rational levels.Footnote ⁷ The regulation helps them do that, in part. As type I consumers are already rational, their demand is unaffected. The full impact of the regulation is therefore a reduction in type II consumption from $Q_{\text{II}}$ to $Q_{\text{II}}^{\prime }$ .

Figure 2 Welfare with regulatory interventions. The four impacts of regulations: (1) health benefits; (2) monetary savings; (3) lost utility, resulting from both withdrawal costs and steady-state lost pleasure; and (4) welfare losses from higher explicit or implicit prices for the good paid by continuing users.

With the reduction in demand, $D_{\text{II}}$ would shift inward to pass through the new equilibrium. For simplicity, we do not show this in the figure. In the limit where type II consumers are fully constrained or otherwise induced to reduce consumption to $Q_{\text{I}}$ , $D_{\text{II}}$ would be equal to $D_{\text{I}}$ .

As a consequence of the regulation, the welfare of type II consumers would be affected in three ways. First, there is the health benefit of reduced consumption. This is the red box in Figure 2: the expected health cost per unit consumed times the reduction in units consumed. This is the standard effect noted in the literature.

Second, consumers would save money on the packs of cigarettes they no longer buy. This is the right-hand side of equation (2) and is shown as the green rectangle in Figure 2 – the retail price per pack times the reduction in consumption. The entirety of the green rectangle is a benefit to consumers, but not all of it is a social benefit. There may be lost tax revenue or producer surplus, which would be netted out for the social benefit. As noted above, we focus here only on the consumer component.

Third, there is a utility change associated with reduced consumption. This includes the first two terms on the left-hand side of equation (2). Graphically, this change in utility corresponds to the blue area under the type I demand curve for the addictive good between $Q_{\text{II}}$ and the new level of consumption. The key point is that the demand curve for the rational consumer (type I), not the consumer with behavioral difficulties (type II), should be used. The reason is that the rational consumer’s demand reflects the true value of smoking to all consumers – both type I and type II.

The analysis to this point has focussed on a single time period. When a regulation is just enacted, the utility lost from reduced consumption includes both withdrawal costs for those cutting back and any steady-state lost pleasure. Over time, however, the withdrawal costs will decline, as people adapt to less use of the addictive good. The steady-state costs will remain, but these are smaller than the short-run costs – perhaps significantly so.

Analytically, this distinction is seen in the first two terms in equation (2). Imagine a consumer who has been consuming $a_{\text{high}}$ for a number of years – long enough for the stock of past consumption $(S_{t})$ to equal $a_{\text{high}}$ . The annual benefit of consumption is then $v(({\it\alpha}_{1}-{\it\alpha}_{2})\ast a_{\text{high}})$ . Now suppose regulation induces the individual to switch to $a_{\text{low}}$ . The steady-state benefit of consumption is $v(({\it\alpha}_{1}-{\it\alpha}_{2})\ast a_{\text{low}})$ . The loss in steady-state utility from the reduction in smoking is approximately $({\it\alpha}_{1}-{\it\alpha}_{2})\ast v^{\prime }\ast (a_{\text{low}}-a_{\text{high}})$ . If ${\it\alpha}_{1}\approx {\it\alpha}_{2}$ – that is, the major benefit of continuing to smoke is avoiding the withdrawal cost – there is very little steady-state loss to reduced consumption. But moving to that point involves withdrawal costs, which are given by $\sum _{i}v({\it\alpha}_{1}a_{\text{low}}-{\it\alpha}_{2}S_{t+i})$ for a one-time jump in consumption. These withdrawal costs may be large.

Graphically, this situation can be expressed as a rotation of the demand curve over time. If a person stops or cuts back on smoking, their stock of addictive capital declines in the future. This will lead to a downward rotation in the demand curve – the same quantity brings less value because it does not reduce withdrawal symptoms. This process continues until the addictive stock reaches its new, lower level.

In Figure 2, demand curve $D_{\text{I}}^{\prime }$ is the value of addictive or habitual good consumption to type I individuals in steady state, when the stock of addictive capital has declined to its long-run level. The downward slope to the demand curve is consistent with ${\it\alpha}_{1}>{\it\alpha}_{2}$ ; type I individuals value the addictive or habitual good, even beyond avoiding withdrawal. Even still, the value of consumption is lower than in the short-run demand curve $(D_{\text{I}})$ because in the long run there are no withdrawal costs. The steady-state lost utility may be significantly lower than the short-run utility loss, as the figure delineates.

Distinguishing between withdrawal costs and steady-state welfare losses cannot be done without knowing ${\it\alpha}_{1}$ , ${\it\alpha}_{2}$ , and the evolution of $S_{t}$ . We return to our empirical implementation of this below.

Regulations that affect price or product attributes have similar effects to the analysis above, with one addition – the impact of the price change on those who continue to use the addictive or habitual good. Suppose that a regulation increases the implicit price of the product from $P_{\text{h}}+P_{a}$ to $P_{\text{h}}+P_{a}+P_{\text{I}}$ , for example, by increasing manufacturing costs, raising the time associated with seeking out the good, or reducing valued attributes. The type II consumers who stop using the good are affected the same way: they receive health benefits and cost savings, and suffer lost utility.

There is an additional cost, however, corresponding to the higher implicit prices paid by the type I and type II consumers who continue to use the good. Figure 2 shows the implicit price increase and welfare changes that result from that. The additional loss for type II consumers is the higher cost times the consumption of remaining type II smokers. Type I consumers suffer that same loss and in addition there is a deadweight loss from those type I consumers who are discouraged from using the good but rationally would do so.

In each of these cases, the cost is the private cost to the individual. The social cost may be the same as this or smaller, for example, if some of the higher price is a transfer to the government or to private firms. Consistent with our earlier delineation, we consider only the impact on individual consumers in this paper.

In practice, it is sometimes difficult to determine if a regulation affects the price of using a good or not. For example, graphic warning labels on cigarettes increase the salience of health information for consumers but (possibly) reduce the smoking experience for those consumers who continue to smoke. Whether information affects implicit prices – and for whom – is an empirical matter as much as a theoretical one.

2.1. Baseline information

Our analysis is based on the demand curves analyzed above, so we start with empirical formulations of those curves. The data on smoking that we employ are from the 2010–11 Tobacco Use Supplement to the Current Population Survey (CPS-TUS). These data contain information on adults’ current and former smoking status, and various measures of addiction and desire to quit smoking. We utilize the CPS data weighted to U.S. population totals.

The average smoker in the CPS-TUS consumed 230 packs of cigarettes annually, and the average retail price of cigarettes in 2010–2011 was $5.43 (Orzechowski & Walker, 2012). Thus, the demand curve for the average smoker must pass through this point. Consistent with existing research on the elasticity of demand for cigarettes (Chaloupka & Warner, Reference Chaloupka, Warner, Culyer and Newhouse2000, Gallet & List, Reference Gallet and List2003), we assume a price elasticity of $-0.3$ . As in our theoretical description, we linearize the demand curve around the equilibrium values, implying a slope of $d\!P/d\!Q=-0.079$ . We assume this slope applies for both type I and type II smokers.

There is no perfect division of the population into type I and type II smokers, as we do not know whose smoking behavior is rational or not across the population. In the absence of ideal information we make two cuts at the delineation between type I and type II consumers, each of which we continue through our analyses. Our first distinction separates those who are addicted to cigarettes from those who are not. A widely used measure of nicotine addiction is whether the person has their first cigarette within one-half hour of waking (CDC, 2014). We define type I smokers as those who do not have their first cigarette within one-half hour of waking, and type II smokers as those who do.

As Table 1 shows, 56% of current smokers fit the definition of not addicted (type I) and 44% are type II.Footnote ⁸ Type I and II smokers differ in systematic ways. Compared to type II smokers, type I smokers are younger (average age of 41 vs. 45), better educated (15% with a college degree vs. 9%), and have a higher income (18% with a family income above $60,000 vs. 14%). Type I smokers also consume fewer cigarettes than type II smokers: 152 packs per year compared to 327 packs per year.Footnote ⁹

Table 1 Alternative delineations of Type I and Type II smokers.

Note: Data are from the CPS-TUS and are weighted to national totals. People who are nicotine dependent have their first cigarette within one-half hour of waking. ^*For the initiation analysis, the Type II group includes people in the 30–45 age range only.

Our second proxy for type I and type II smokers uses demographic information that is associated with better information and more rational behavior. We consider type I smokers to be people aged 30–45 having a college degree or more, and type II smokers as those over age 45 or age 30–45 without a college degree. Individuals in the 30–45 age range began smoking well after the health risks of smoking became well-publicized and thus had better information with which to make decisions. Further, having a college education correlates with the time and ability to process scientific information about risks and with greater resources enabling people to carry through on forward-looking decisions. As education decisions are not yet final for much of the population below age 30 and full economic rationality for part of that group is suspect (as noted above), we omit them from this analysis.

Not surprisingly, smoking decisions vary greatly across these groups. Type I smokers smoke 162 packs per year, compared to 250 packs for type II smokers. Type I smokers are only 6% of the smoking population age 30 and above. Clearly this delineation does not fully reflect the type I population but rather captures a segment whose behavior may best approximate the rational benchmark. To the extent that many other people are rational smokers but are grouped as not fully rational, or that some of those who are 30–45 and well educated are not fully rational, this will bias us away from finding any large difference between the groups, thus overstating the potential losses from smoking cessation. For these reasons, we do not consider either measure superior to the other. Rather, we view the similarity of findings across two different measures a strength of our analysis.

2.2. Impact of a salience-based intervention that increases cessation

We start with an information intervention that reduces the share of overall smokers in the population by 10%. Because the intervention is based on information only, all of the reduction is assumed to be among type II consumers.

The welfare effects of such a policy can be measured in three steps, corresponding to Figure 2 above. The first impact is the health benefit to people who curb their consumption, including both improvements in morbidity and mortality. A number of studies show the adverse impact of smoking on length and quality of life (CDC, 2014). Mortality is the traditional consequence; a more recent literature has focussed on morbidity effects as well. We show results using only mortality and including morbidity as well. Valuing health benefits in dollar terms requires two additional parameters: the discount rate and the value of a quality-adjusted life year (QALY). Following standard OMB guidelines, we use two discount rates: 3% and 7%. In line with a recent review of high-quality research on values per statistical life (VSL) (Robinson & Hammitt, Reference Robinson and Hammitt2015), we anchor our estimates of the value per QALY in VSLs of $4.3 million and $9.3 million; accounting for age-related changes in the health-related quality of life, these estimates imply values per QALY of $220,000 and $480,000 at a 3% rate, and $370,000 and $790,000 at a 7% rate.Footnote ¹⁰ The results, shown in the first row of Table 2, are that continuing to smoke has a health cost of about $200,000 to nearly $1.5 million for a 35-year-old smoker.

Table 2 Estimated utility losses from quitting using the demand approach for a 35-year-old smoker.

Notes: Values per statistical life are from Robinson and Hammitt (Reference Robinson and Hammitt2015). Values per quality-adjusted life year (QALY) are adjusted to reflect age-related changes in health-related quality of life (Hanmer, Lawrence, Anderson, Kaplan & Fryback, Reference Hanmer, Lawrence, Anderson, Kaplan and Fryback2006). In analyses including morbidity, smoking is assumed to reduce the QALY by .05 (from Jia & Lubetkin, Reference Jia and Lubetkin2010); after a person quits, the discount is assumed to fade out over the next 5 years. Expected lifetime health benefits of quitting are computed by taking the difference between the expected present discounted value of future QALYs if the person quits, to that if the person continues to smoke until death. Data on mortality risks are taken from Arias (Reference Arias2010, Table 1); data on relative risks for current and former smokers are from Vugrin et al. (Reference Vugrin, Rostron, Verzi, Brodsky, Brown, Choiniere, Coleman, Paredes and Apelberg2015, Appendix). To compute implied health cost per pack, we divide the expected lifetime health benefits of quitting (i.e., the cost the person would incur by continuing to smoke) by the expected number of packs the person would smoke: this is the expected additional number of years the person would smoke, times 232 packs per year (average packs per year, computed from the CPS-TUS). In estimates allowing for the possibility of ongoing utility losses from quitting, the loss is assumed to be 100% of the dollar value in the year when the smoker quits, 50% the next year, and 25% thereafter.

Second, there is the money saved. Smokers who quit save $5.43 for every pack they do not buy. The savings is $1776 per year for the addiction-based delineation and $1358 per year for the age/education delineation. We take the central value to be about $1500 per year.

Finally, there is the utility offset from reduced smoking. We start on the utility offset using the implied value of cigarettes for type I consumers at the level of type II consumption. The estimates for the health harms of smoking described above imply that the health cost per pack of cigarettes ranges from $25 to $175 (the second row of Table 2). Given the slope of the demand curve, we can determine how much lower prices would need to be for type I consumers to smoke at the level of type II consumers.Footnote ¹¹ We estimate the price reduction to be $7–14 per pack. Multiplying the implied value of a pack of cigarettes by the number of packs given up yields utility losses ranging from $5500 to $54,000 for smokers who quit (the middle block of Table 2); focussing on results with both morbidity and mortality costs of smoking, we take the central value to be $25,000.

2.3. Valuing effects on initiation

The analysis of initiation is conceptually similar to that of cessation: we estimate the cost savings and utility offsets to those who are deterred from initiating, along with any additional costs to those who initiate even after the regulation. Using the same methodology as before, the health benefits of noninitiation for an 18-year-old are substantial, ranging from $312,000 to $1.2 million when morbidity and mortality costs are included, depending on assumptions for the VSL and discount rate.Footnote ¹⁴ The money savings from reduced spending on cigarettes is again $5.43 per pack, or about $1350 per deterred initiator per year.

The difficult question is again the utility offset – what is the lost utility of the type II individuals who are deterred from smoking by regulations? Empirically, we will measure this as the implied value of smoking for type I individuals were they to smoke at the level of type II individuals.

To focus on initiation, we confine the analysis to individuals aged 30–45, who came of age at a time when the harms of smoking were generally well known. Thus, we can approximate the informed population’s smoking decisions. We can only estimate initiation rates by demographics, since we do not know initiation rates by potential to become addicted. As shown in Table 1, type I and type II individuals have very different smoking initiation and cessation patterns. About 80% of type I individuals never smoked, compared to only 60% of type II individuals. Further, most of the type I individuals who started smoking subsequently quit; fewer type II individuals quit. Together these differences yield current smoking rates of 7% for type I individuals and 17% for type II. While the type I rate suggests an annual initiation rate consistent with well-informed standard preferences of around 7%, even this estimate is likely too high as some well-educated young smokers probably initiated “accidentally” in their teens and now would prefer to quit.Footnote ¹⁵ Thus, the “rational” smoking rate not conditional on having started may be much below 7%.

What then can we infer about the value of forgone utility of cigarette consumption for type II individuals deterred from initiating? As noninitiators face no withdrawal cost, the only potential utility loss they could experience would be a steady-state loss from not consuming cigarettes. Whether there is such a loss depends on how type I individuals would value the consumption done by type II individuals, which in this case entails gaging how individuals at the 17th percentile of the type I distribution of cigarette consumption would value smoking. To match the 17% smoking rate of type II individuals, demand among type I individuals would need to rise by 140%. Assuming the same demand elasticity as in the cessation analysis,Footnote ¹⁶ the monetary cost of smoking would need to turn significantly negative to induce type I consumers to smoke at the same rate as type II consumers. With our expectation that 7% overstates the rational smoking prevalence, the required price would have to be even more negative to induce this increase in demand.

Given these estimates, it seems implausible that people far from the margin of smoking value cigarettes highly. Put another way, because people deterred from starting to smoke never develop a special taste for tobacco products, they are able to get equal or better satisfaction from consuming other products, so a regulation that deters them from starting to smoke entails no utility loss. Therefore, the weight of the evidence suggests that analyses should assume no lost utility for prevented initiation among type II individuals. The health benefit and money saved would then be the full benefit.

The analysis of how a price- or attribute-based regulation would affect initiation also requires accounting for the higher price that people who choose to smoke even in the face of those higher prices will pay. A price increase of about $1.40 would be needed to reduce the quantity of cigarettes consumed by potential initiators by 10%.Footnote ¹⁷ The welfare loss from this would be about $275 for each continuing initiator each year ($1. 40 ×∼200 packs), assuming all continuing initiators paid the higher cost. This offsets some, but not all, of the health benefits and cost savings.

2.4. Summary

Table 3 presents a summary of our findings. The upper panel of the table is the analysis of cessation for both types of regulations. The second row of each panel shows the money savings for people deterred from smoking, which are added to the health benefits in the first row.

Table 3 Summary of utility offsets for existing smokers and potential initiators ^* .

* Regulation assumed to reduce consumption of existing smokers by 10% and reduces initiation by 10%.

The most difficult issue is the utility loss from reduced smoking. The potential for utility losses is greatest among smokers who quit, although most losses can be expected to be transitory because of the importance of withdrawal. Among others potentially affected by regulations, young people deterred from initiating do not experience utility losses, while people who continue to smoke experience losses only if prices increase or product attributes change in ways that reduce their value. Altogether this analysis suggests that utility offsets will vary across regulations, depending on the changes in behavior the regulation is expected to cause at the intensive and extensive margins.