Smoking pollution permits: a market-based smoking ban?
With California, New York, and Washington passing smoking bans, it looks like government control of smoking is here to stay.
But are smoking bans the best way to do that?
Maybe not. Instead, there may be another way for governments to cut smoking in bars, but with lower economic and administrative costs: A market for tradable smoking pollution permits, similar to the those used by the EPA to curb other kinds of pollution.
Smoking and Externalities
Beneath the smoking-ban controversy is a simple pollution problem. Property rights over personal air space in bars don’t have clear lines. If you go to a non-smoking bar, you get no smoke. But if you go to a smoking bar, you might get a little smoke or a lot—how close can someone blow their smoke before you get irritated? And it’s not easy to divide up those personal air-space rights and enforce them.
In the language of economics, we’ve got an externality problem between smokers and non-smokers. Even within smoking bars, neither party’s property rights over air space are well defined. And even if they were, they’d be hard to defend. Smoke has a nasty habit of floating into other’s faces on it’s own.
In the days when smoking rates were higher and estimates of health risks lower, these fuzzy lines didn’t matter much. But today fewer people smoke, and those who do are perceived as emitting a more dangerous pollutant than in the past.
As a result, the economic value of property rights over personal air space has gone through the roof. And whenever that happens, people work to more carefully delineate and enforce rights. Smoking bans are just an attempt to resolve this property dispute, by handing all the rights to non-smokers, without regard to economic cost.
That’s obviously not the right policy. We’ve done a good job handling other pollution problems in the past. So what can we learn from these experiences about the best way to handle smoking pollution?
How Pollution Permits Work
One big lesson comes from a major success in U.S. environmental policy in recent years—the use of tradable pollution permits rather than direct regulation.
Tradable permits use the carrot of economic incentives to cut pollution rather than the stick of regulatory penalties. Lawmakers define the overall level of pollution that’s socially acceptable, and then issue tradable permits corresponding to that amount. If companies want to pollute, they’ve got to hold permits equal to their emissions. That gives firms a market incentive to cut pollution, since they can sell unused permits to others.
Society gets less pollution. Companies adjust in the lowest-cost way. Lawmakers can slowly scale-down the number of permits over time. Win, win win.
If cap-and-trade permits can cut pollution in staggeringly complex industries like manufacturing, why not in the comparatively simple industry of bars? Why not harness the market to cut public smoking, rather than fight it with costly and controversial bans?
A Market-Based Smoking Ban
Here’s how tradable smoking permits might work. Let’s say a city council wants to cut smoking in bars to 70 percent of the current level. No problem—each bar has a fire occupancy, city officials would total up the fire occupancies of smoking bars, multiply by 0.7, and then create that many permits.
Here’s the catch: if bar owners want to allow smoking, they’ve got to hold permits equal to their fire occupancy. Pretty simple.
How do we hand out the initial permits? Auction them off. In fact, the system might raise enough auction revenue to make the whole system revenue neutral to the city.
Bars could sell unused permits to others, giving them an economic incentive to go non-smoking. And there’s no need for a costly bureaucracy to handle exemptions for “economic hardship” for cigar bars and hookah lounges. Everybody can bid for permits in the marketplace. From there, the Coase Theorem takes over.
If anti-smoking groups want less smoking over time, they could buy and retire permits. If ending smoking is such a moral imperative, let anti-smoking groups put their money where their moral ferver is.
And the best part—at least for economists like me—is that the experiment would generate great data on the real economic value people place on smoking in bars and restaurants. We’d just look at the tradable permit prices. So when the next city proposed an outright ban, we’d have compelling evidence of the economic costs.
So what advantage does a smoking ban have over a system of tradable smoking permits? It’s hard to see any—except that extreme policies like bans get political activists excited, whereas sensible policy like tradable permits is, well, pretty boring.
Update: See the Wikipedia entry on tradable smoking pollution permits here: http://en.wikipedia.org/wiki/Tradable_Smoking_Pollution_Permits.
Update 2: See this September 25, 2005 op-ed in the Madison State Journal on the idea.
Posted by Andrew on Friday April 14, 2006 | Feedback?
