When we consider effective regulatory policy for the cigarette industry, it is necessary to assume a perspective that stems from the theory of the rational consumer. In short, this means that policy-makers ought to consider the reasons why consumers choose to purchase cigarettes and forego the other goods they could purchase instead. The concept of rational choice provides the basis for the economic analysis offered in this study. The analysis begins by demonstrating the need for regulation of the industry. There are three market failures that provide the incentive to regulate. First, the addictive effects of nicotine may distort the rationality of consumers by breaking down the rational constraints that individual consumers construct to maximize utility. Second, there are negative externalities in the consumption of cigarettes. That is, there are risks and costs that are borne by society as a result of some individuals’ use of cigarettes. When unnecessary risks and costs are incurred by society, an incentive for regulation is justified. Third, there is a lack of complete information on the dangers of cigarette smoking that necessitates some government intervention. An effective regulatory policy must spread the information on the health risks of smoking to Americans, especially to the teenage populations that are targeted by the industry. Using the framework of economics and the concept of rational decision-making, the analysis culminates in a policy recommendation that addresses these market failures and attempts to make regulation more effective.
Scott Walton, ’00 Elk Grove, IL
Major: Politics and Economics/Business
Sponsor: Donald Cell