Smoking behavior and its effects of non-smoking is constantly in the news. The latest news is from the mighty halls of Congress where Rep. Tancredo’s (Republican) cigar smoke drifted into Rep. Ellison’s (Democrat) office and a member of Rep. Ellison’s staff called the Capital Police to investigate. The rule on smoking in Congressional offices is that the Congressman decides makes the smoking policy for his own suite of offices. That seems like a decent rule.
Here at Nicholls, things are a bit different.The first edition of the Nicholls Worth in 2007 led with the headline “Smoking ban causes decline in bar sales.” Not only has the Nicholls Worth provided Nicholls economics students with a good example of complementarity of goods (goods that tend to be used together), but other important issues are raised in their editorial on the smoking ban. The editor clearly sees through the smoke that clouded the thinking of our state legislators (surely those guys in
Baton Rouge were smoking something much stronger than mere tobacco when they came up with this one). The editor sees that both smokers and non-smokers have rights and that these rights are reciprocal. If we allow smoking, we grant certain initial rights to smokers that end up harming non-smokers. If we ban smoking, the rights of the non-smokers are upheld, harming smokers. Smoking in a public place, where some innocent by-standers are harmed by the production or consumption of someone else is an example of a general class of problems with not only markets, but all forms of social exchange, a problem that economists term “externalities.” With externalities, costs (or benefits) are imposed on those “external” to the original exchange, someone other than the buyer or the seller, a sort-of innocent bystander problem. In situations of external costs, the buyer gets the good without paying all of the costs of his actions and ends up consuming more than he or she would if he had to pay full cost.
As an aside, note that people are now claiming that those who consume fossil fuels, such as gasoline, are creating external costs through the creation of greenhouse gases, such as CO2 . These greenhouse gases lead to global warming, they suggest, and fossil fuel consumers should (that is a very normative “should” by the way) be forced to pay full costs of their actions via instituting a tax on carbon meant for combustion.
Well, all of this leads us to something called the Coase Theorem. Ronald Coase, in 1960, suggested that there was a problem of this whole notion of externality, which also is called “social cost.” The problem, he said, was due to this reciprocal nature of externalities. We can cater to the smokers, costing the non-smoker, or to the non-smoker, costing the smokers, as was noted by the Nicholls Worth editorial. So, no matter which way we set the “rights,” there will be external costs. Coase suggested that if the very act of trading (making transactions) was costless, it would not matter who had the initial right that the other side would pay to get their way, that either way, we would end up in the same place, further, that we could not improve on that situation without harming someone—which is what economists call “economic efficiency” or “Pareto Optimality.” The idea is that if the non-smoker preferred not to be bothered by the smoke of others more than the smoker preferred to be able to smoke, the non-smoker should be willing to pay the smoker to refrain from smoking. So if there were no costs to cutting a deal with the smoker, we would end up in the same place if we gave the smoker the right to smoke and the non-smoker could buy him out or if we gave the non-smoker the right to have no-smoking to start with, and after the dealing were done, we would be at an efficient position.
One of the main points of Coase’s theorem, and one that is pointed out by law professors Guido Calabresi and Douglas Melamed in their very important work, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral (Harvard Law Review, 1972), is that there are often cases of what Coase called high “transactions costs,” and when these costs are significant, economic efficiency is served by setting the rights in such a way as to arrive at the rights that would occur if there were no transactions costs, because the costs of cutting a deal are just not worth the bother. Transactions costs should be understood as just costs of cutting the deal as separate from what people face with the deal itself. Lawyers’ fees for coming up with terms of the contract would be a form of transactions costs. The opportunity cost of waiting in line to make payment would be another type of transactions cost. Another way, then, of understanding transactions costs is a cost of trading not received by the other side of the exchange.
Here is a little of what Calabresi and Melamed had to say:
The first issue which must be faced by any legal system is one we call the problem of “entitlement.” Whenever a state is presented with conflicting interests of two or more people, it must decide which side to favor. Absent such a decision, access to goods, services, and life itself will be decided on the basis of “might makes right” – whoever is stronger or shrewder will. Hence the fundamental thing that law does is to decide which of the conflicting parties will be entitled to prevail. The entitlement to make noise versus the entitlement to have silence, the entitlement to pollute versus the entitlement to breathe clean air, the entitlement to have children versus the entitlement to forbid them – these are the first-order of legal decisions.
They go on to point out that once the state picks who has the right to something, such as the right to smoke or the right to clean indoor air, the state must then decide how to enforce those rights. Three methods for protecting people’s entitlements that Calabresi and Melamed suggest are:
Property rules, which involve the law of contracts, where the price is set by the free working of the market system, rather that by government or judicial edict. The terms of trade or the rates of exchange are set through bargaining or through the market.
Liability rules, which involve tort law, where the price or exchange rate is set by a judge or some other dispassionate third party. The terms of trade or the rates of exchange are determined by a judge or uninvolved third party.
Inalienability, which means no exchange of rights can take place at all, no matter how much one side may be willing to pay the other side to get his way.
Largely what Calabresi and Melamed talk about is the balancing of costs to non-smokers of this second-hand smoke and the costs to smokers of not being allowed to smoke. While it might make sense to have such bans in some public spaces, extending the notion of public space to the privately owned bars and restaurant seems to be a stretch because these places are owned by some private citizen(s). We should note that it is exactly these restaurant and bar owners who have the most to gain from setting the smoking or no-smoking rules because they are in a position to balance the costs of smokers not being able to smoke with the costs of non-smokers breathing second-hand smoke. Whether it is ok or banned in their establishments is a decision to be made by the owner with an eye on demand by their customers and the demand lost by making one decision or the other. Banning favors the non-smokers, and restaurants may wish to cater to non-smokers and do away with smoking in their place of business, but they must face what happens to their paying customers. Does the business, on net, gain or lose revenues? Allowing smoking, of course, favors the smoker. Still, if it meant that much to non-smokers, they could always pay smokers to stop. In a competitive environment, some restaurants or bars could always ban smoking in their establishment and gain many of the avid non-smokers as a result, and others could specialize in catering to smokers. With a private ban ordered by the owner of the business, the business owner could still be persuaded into changing his decision if it could be shown to be worth it.
We should note some other conclusions of Calabresi and Melamed concerning where the rights fall.
That economic efficiency standing alone would dictate that set of entitlements which favors knowledgeable choices between social benefits and social costs of obtaining them, and between the social costs and the social costs of avoiding them;
That this implies, in the absence of certainty as to whether a benefit is worth its costs to society, that the cost should be put on the party or activity best located to make such a cost-benefit analysis;
That in particular contexts, like accidents or pollution, this suggest putting costs on the party or activity which can most cheaply avoid them;That in the absence of certainty as to who that party or activity is, the costs should be put on the party or activity which can with the lowest transaction costs act in the market to correct an error in entitlements by inducing the party who can avoid social costs most cheaply to do so; and
That since we are in an area where by hypothesis markets do not work perfectly–there are transaction costs–a decision will often have to be made on whether market transactions or collective fiat is most likely to bring us closer to the Pareto Optimal result the “perfect” market would reach.
However, an out-and-out ban on smoking in bars and restaurants, as our legislature has passed, puts the entitlement protection that Calabresi and Melamed discuss into the realm of “inalienability,” where no one can act to trade to correct errors in entitlements. The law creates prohibitive transactions which make it more or less impossible for smokers and non-smokers in a bar to make any trades that will lower the total costs of smokers not being able to smoke and non-smokers facing second-hand smoke. Who is in the best position to act to reduce these social costs? The owner–just like the Congressmen get to do in their own offices.
In the interest of full disclosure, I should tell you that several times when the issue of cigarette tax increases for the state of Louisiana came up in the legislature, I was asked to testify before the House Ways and Means Committee concerning my research on the effects of state cigarette tax hikes. The Tobacco Industry did pay me as an expert. My main publication on this was “A Note on Estimating Cross-Border Effects of State Cigarette Taxes“ RM Coats – National Tax Journal, 1995, where I estimate two crucial tax elasticities of cigarette demand that allowed me to estimate the effect of state cigarette taxation on the change in cigarette demand to and from other states. In my testimony, I noted that I was an avid non-smoker. I should also point out that my research on cigarette taxation has been cited by those on both sides of the issue.
MC
