Many countries have recently imposed a ban on smoking in public areas, including restaurants and bars.
Discuss whether an outright ban is necessarily superior to either a Pigovian or Coasian solution to the externalities created by smoking in public places.
Partial smoking bans have become increasingly popular in Western democracies in recent years and tend to revolve around the banning of smoking in public areas. This essay will explore economic arguments and solutions relating to the externalities caused by smoking. The central problem at the heart of this issue is the over-consumption of cigarettes and the problem that the externalities of smoking cause for the general ...view middle of the document...
285; Johnsen et al, 1981). However, some economists have preferred to replace the notion of externalities with the term “external effects” and this idea refers specifically to the social costs and benefits of either a public or private enterprise rather than focusing upon the effect of externalities from a financial perspective (Thomas 2010: p.62; Sandmo, 1975). Examples of negative externalities include pollution from road transport, litter in public places, noise pollution and externalities related to alcohol and smoking consumption (Stone, 2008). In such situations, what is known as the marginal social benefit of consumption (SMB) is less than the marginal private benefit of consumption (PMB) (Morris et al 2007: p.127). The diagram below illustrates this situation.
Fig. 2 – SMB < PMB (12Tamito’s Blog, 2013).
This type of situation creates a problem in which a particular good or service can be consumed at a greater level than would optimally be the case (Mankiw 2011: p.199). The consequence of this is that effectively the service or product in question is not priced at the correct level, because it is not priced high enough and the cost of the negative externalities relating to the product or service are not reflected in the price (Pigram & Jenkins 2013: p.172).
Pigovian and Coasian solutions to externalities
The Pigovian approach places the onus upon the generator of the externality (Hartman, 1997). In order to remedy the problems arising from externalities the Pigovian framework imposes a tax upon the externality as its favoured policy prescription (Hartman, 1997). As the above analysis has shown, in a context in which externalities lead to an inefficient market in which a product or good can be over-consumed, the Pigovian solution advocates the implementation of a tax to correct the market and to ensure that the cost of externality is placed upon the individual or collectivity responsible for causing the externality (Lai, 2011). In contrast, the Coasian solution to externalities has as its fundamental assumption the idea that externalities are reciprocal in nature. In other words, both the polluter and the poluttee are seen as being responsible for the externality (Schotter, 2008; Hartman, 1997). The Coasian framework places the emphasis from a policy perspective upon bargaining and it suggests that legal rules and institutions should change in order to absorb the impact of the externality in question (Schotter, 2008). The logic underlying the Coasian solution is relatively simple, because it claims that if the market is leading to an inefficient outcome then there must be another outcome that can ensure that at least one of the parties will be better off as a result (Schotter, 2008). A Coasian framework ensures that the market will be able to navigate the costs of externalities via bargaining, as long as property rights are clearly defined (Schotter, 2008; Hartman, 1997).
The smoking ban
In order to understand a Coasian solution...