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Table 5 Total net transfers from smokers to non-smokers 1986 In millions of dollars Net external costs -244.0 Additional taxes paid 3,168.2 Pension plans 1,417.4 Total net transfers 4,341.5 Note: Due to rounding, total may differ. 2/ From the 'life-and-death' model, we also know, for each year after 1986, how many deceased smokers would have been alive and over 65 years old had they not smoked. To determine how much they would have received from each type of pension plan, it is sufficient to mul- tiply their number, first, by the propor- tion of those 65 and over receiving money from that particular plan and, second, by the average amount of bene- fit paid out. Taking the present value of the differ- ences between additional contributions and benefit payments for each relevant year after 1986, we arrive at $2 billion. This is the amount that would have been necessary in 1986 to guarantee that the deceased smokers would benefit from pension plans exactly as non-smokers. Since smokers would participate in gathering this sum, only part of it is a transfer to non-smokers. Using once again the proportion of Canadian taxpayers who did not smoke in 1986 (69.15%), a transfer of $1.4 billion was obtained.26 The Net Transfer If we sum the transfers over the three cate- gories above, we get Table 5. From our assumptions and the above analysis, it emerges that any notion that smokers are a burden on society in general or on the non-smoking population in partic- ular is without foundation. Actually, for 1986 in Canada, non-smokers enjoyed a standard of living $4.3 billion higher than it would have been if there had been no 310 Andre Raynauld and Jean-Pierre Vidal smokers at all, according to our assump- tions and methodology. V Methodological Issues Our results differ very considerably from the conclusions reached by several authors, including those who examined the Canadian situation. These major differences come mainly from the methodology used and involve a number of considerations that may or may not be held relevant to the analysis of the financial burden of smokers on society. There are three major issues: 1/ the re- duction of future costs associated with the assumed early deaths of smokers; 2/ the no- tion of financial transfers between smokers and non-smokers; and 3/ finally, the most important one, the inclusion or exclusion of personal income losses in the balance sheet. The Reduction of Future Costs Although E.R. Shillington (1977) and N. Collishaw and G. Myers (1984) ignored the reduction of future healths costs, we main- tain that these savings must be deducted from the supplementary costs associated with smoking. It is a matter of very simple logic to argue that if smokers die earlier than non-smokers, between the time of their early death and the time they would have died had they not smoked they will not use the services typically used by non- smokers. In any case, in approaching the problem in this way one may claim the sup- port of several authors, such as A.B. Atkin- son and J.L. Townsend (1977), W.F. Forbes and M.E. Thompson (1983), G.T. Watts (1983), R.E. Leu and T. Schaub (1983, 1984), and A. Markandya and D.W. Pearce (1989)?7 In dollar terms, this item is not crucial, but it is not negligible either. As already in- dicated above, it reduces tobacco-related health cost by $462 million. Transfers Financial transfers between smokers and non-smokers are not considered in the ref- 2501357046

erence studies cited above. In our view, such transfers, which determine who pays and who benefits between smokers and non-smokers respectively, are an essential component in any assessment of the burden that smokers may or may not impose on society. There are two steps in such an analysis. First, one must incoporate taxes paid by smokers, because on efficiency grounds alone and consistent with the Pigovian ap- proach, such taxes are a compensation for the external costs generated. An optimal tax in this context is one that just equals this external cost at the margin. Up to this point we follow A.B. Atkinson and 'r.W. Meade (1974), as well as A. Markandya and D.W. Pearce (1989). However, we make a second, additional, step in this study. As the calculations above indicate, total external costs and taxes are adjusted by the relevant proportions of smokers to derive transfers in the strict sense of the word. We take a broad view of transfers as it should be. In addition to the taxes on tobacco consumption, our transfers include estimates of the net flow of pension con- tributions and benefits between smokers and non-smokers. The bottom line on over- all transfers is given in Table 5. Own Income Losses Personal income losses are the main em- phasis in most of the literature on the 'economic consequences' (cost) of smoking. For example, personal income loss repre- sents 86 per cent of the 'economic con- sequences' in the study by Shillington (1977); 77 per cent in Collishaw and Myers (1984); and 55 per cent in USDHHS (1990). It seems that all these were inspired more or less directly by D.P. Rice (1966). The concept of 'economic consequences' was renamed 'economic cost' by Leu (1983), and Leu and Schaub (1984), who ration- alised it as the sum of the 'monetary private costs' to smokers plus the 'monetary exter- nal costs' of smoking. The 'economic cost' of smoking would then be the sum of its pri- vate and external components - that is, its social cost - but without considering intan- gible costs such as pain and suffering. It is this concept of 'economic cost' that has been applied to show what a burden smokers are to society. The language used in the Report to Congress, USDHHS (1990), is unambiguous when the authors refer to 'the cost or value to society' (p.38) or when they remark that 'smoking causes large numbers of deaths and a very large dollar cost to society' (p.40). Ultimately, it is suggested that taxes on tobacco should compensate for this huge burden. As we remarked in the introduc- tion, there are numerous published opin- ions to this effect. The fundamental issue to consider in this case is whether own-income losses as- sociated with the premature death of smokers are a private cost or an external cost. Our thesis is that such income losses are a private cost and should not be in- cluded in an analysis of the financial bur- den of smokers on society. The first argument in support of this thesis has been included earlier as one of our three basic assumptions in this study, namely that smokers behave rationally and are well-informed of any possible health hazard from smoking. It might still be argued, however, that even though smokers have knowingly ac- cepted the risk of sickness or early death, they nevertheless impose a loss on society. This evokes the image of smokers dying in their forties and thereby depriving society of another two decades of productive work. Such reasoning may seem persuasive, but it is almost invariably in error. In fact, society tends to reward individu- als strictly in accordance with the contribu- tion it receives from each. It therefore neither gains nor loses with the increase or decrease of its overall numbers. When another worker is introduced into the economy, production rises, leading to the growth of national product. But this does not imply that society as a whole is any more rich or prosperous. This reasoning is not new or original. Smokers' Burden on Society 311

Indeed, there is a strong consensus among economists on this point. In the words of E.J. Mishan (1971a): the loss of potential future earnings, can be rationalized only if the criterion adopted in any economic reorganization turns on the value of its contribution to GNP, or, more accurately, to net national product. But although financial journalists manage to convey the contrary im- pression, maximizing GNP is not an acceptable goal of economic policy. Mishan's judgment highlights the simple truth that the real victim of a death is the dead person concerned, not society as a whole. The three methodological issues just raised are largely responsible for the huge differences between our empirical results and those of our reference studies. The myth and reality of the financial burden of smokers do not rest on the minute details of computations but on the relevant factors to be considered in the analysis. The next section will confirm this conclusion. VI Sensitivity of Results to Relative Risk Coefficients Remembering that our results regarding health costs are based on epidemiological studies which differ widely in their find- ings, a legitimate question arises about the sensitivity of our conclusions to the relative risk coefficients used. All calculations have therefore been done again using 14 differ- ent hypotheses covering a very wide range of possible assumptions regarding relative risk coefficients. They range from smoking is not dangerous at all (,y = 0), to smoking is ten times more dangerous than in the worse scenario envisaged in the reports we used (y= 10). As expected, gross external costs in- crease with the danger smoking poses to health. When -y equals 0, tobacco use is harmless to health, and the only external cost is fire at $54 million. When Y equals 1, relative risk coefficients being identical to 312 Andre Raynauld and Jean-Pierre Vidal those assumed in section II, we get the same result as in section III, of $668.8 million. Af- terwards, costs tend to stabilize toward an upper bound which cannot be exceeded: ob- viously, when y- -, all the etiologic frac- tions tend to 100 per cent, at which point no further costs are left to be imputed.28 On the other hand, when smoking is harmless, there is no reduction in future costs; however, as it becomes increasingly dangerous, it is accompanied by a reduction in future costs. Two characteristics are worth noting: first, the curve describing the reduction in future costs increases at a lower rate than the additional cost curve does; and second, the rate of increase of the reduction cost curve decreases more slowly than the additional cost curve does. These characteristics result in a very in- teresting net external cost curve, shown on Graph 1, which represents the difference between gross external costs and reduction of future costs. It will be recalled that in our reference scenario, where y equals 1, smokers im- posed a net external cost of $207 million on Canadians in 1986. As is apparent from Graph 1, this net external cost appears to be in the neighbourhood of a maximum: whatever the relative risk coefficients one chooses, the net external cost is never sig- nificantly higher than $207 million. Reduc- ing the risk brings a movement to the left of ` y equals 1' and leads to a decline in net external cost, but increasing the risk, al- though it brings a movement to the right, also leads to a decline in net external costs because the reduction in future costs grows at a faster rate than the increase of addi- tional costs in present value (as of 1986). Actually, if it were possible for relative risk coefficients to be as high as when y equals 10, we would have to conclude that there would be a net external benefit of $725,000 (which appears close to zero in Graph 1). The existence of this maximum of ap- proximately $207 million, allows us to ob- serve that, whatever the risk smoking poses to health, the present level of taxation is un- 2501357048

 1. NET COST 0r- EXTERNALITIES justifiable on grounds of efficiency. In other words, since the net external cost function is not an increasing monotonic function of the risk involved in tobacco use, there is no level of danger at which the present level of taxation would be justified. As for the transfer between smokers and non-smokers, whatever the danger tobacco might pose to health, non-smokers always enjoy a much higher standard of living be- cause of smokers. Given our assumptions, iokers are never a burden to non- s.nokers: at worst, non-smokers receive ap- proximately $3 billion from smokers, and at best $7 billion. Without doubt, the net global transfer flow is always to the advan- tage of non-smokers and to the detriment of smokers. At the beginning of this paper, we noted that many authors evaluated the 'economic consequences' of smoking as one huge sum, which has subsequently been interpreted as a burden smokers would be imposing on others. New taxes have been proposed and justified on these grounds. We have shown instead that net addi- tional external costs borne by non-smokers worked out to $244 million for Canada in 1986. However, smokers are responsible for a much larger transfer flow in the other direction. In the pension area alone, non- smokers benefit from a transfer of $1.4 bil- lion mainly because smokers tend to die before non-smokers do if we use risk coeffi- cients established by the medical profes- sion. Finally, the massive tax burden borne by smokers alone means that they account for a further transfer of close to $3.2 billion to the benefit of non-smokers. Overall, as Table 5 indicates, smokers make a net over- all contribution of $4.3 billion to the bene- fit of non-smokers. Whatever the degree of risk or danger at- tributed to tobacco, the validity and direc- tion of these conclusions remain un- changed. Smokers' Burden on Society 313 _,:h,.

Notes 1 See Forbes and Thompson (1978), Wilkinson et aL (1978), Heins (1978), Kristein and Grove (1978), Cady (1983), Warner (1983), Cady (1986) and Hof- fenberg (1988). Studies on the 'economic con- sequences' of smoking such as those of Shillington (1977), Collishaw and Myers (1984) and the US Department of Health and Human Services (USDHHS,1990), have been interpreted as imply- ing a financial burden on the part of smokers. Strictly speaking, this implication is incorrect. See also Rice (1966), Stoddart (1987), Choi and Nethercott (1988), Freour et al. (1976), Luce and Schweitzer (1978), Shultz (1985), Hinds (1986), Gorsky, Schwartz and Dennis (1990), Gray et al. (1988). A closely related literature claims to follow 'cost-bene6t' analysis. A typical example is found in Forbes aqd Thompson (1982), and a criticism in Woodfield (1984). 2 We used the Reports of the years 1982, 1983 and 1984. For a Canadian study, taking our relative risk coefficients from an American source may ap- pear to be a second best, especially if one believes, as we do, that geographical variables may be im- portant. However, some Canadian studies are in- cluded in these reports. 3 Although we did not review the medical literature systematically, we did come across some very dis- turbing findings for the 'conventional wisdom' about cigarette smoking and health. These lead us to believe: first, that the results of epidemiological studies might very well be strongly biased by the omission of some crucial variables from the statis- tical analyses, such as personality (especially risk aversion) which is responsible for a larger set of detrimental behaviours as well as beneficial ones, like exercising; and second, that adequate care had not always been taken in building the samples used in epidemiological studies. See Seltzer (1989 and 1980). Sterling and Weinkam (1987), and Tol- lison (1986). 4 We assume implicitly that the morbidity risk coefficients are the same as the mortality risk coefficients, because the statistics required to dis- tinguish the two are inadequate. This assumption is not favourable to our conclusions. 5 Prospective studies are based on a random sample of individuals who are monitored over a number of years to determine how many among them will die of a lung cancer and were subject to smoke. Retrospective studies by contrast examine, ex- post, people who have died of a lung cancer and seek to determine how many among them were subjected to smoke. A retrospective study does not give a relative risk coefficient (), strictly speak- ing, but an approximation of it 6 Our emphasis in the text. 7 We do not deny that for those who are already vic- tims of chronic obstructive lung disease, smoke could be the cause of some discomfort. We do not deny either that some people may complain of minor eye irritations, and the like, if they stay long enough in a room filled with thick smoke. How- ever, what we do hypothesize is that it is far from established that someone can contract a disease requiring significant health care only because of environmental tobacco smoke. Later, we will ex- plain why we do not evaluate the sums non- smokers would be willing to pay to avoid such inconveniencies. 8 See also Chaloupka (1990), and Becker, Grossman and Murphy (1990). 9 For further details on epidemiologic methods see Miettinen (1972,1974), and Walter (1975; 1976). 10 Preliminary data for 1985-1986, from the Cana- dian Health Information Center. These data will be revised and published in the catalogue 82-206 (Statistics Canada, forthcoming b). 11 The average cost per day is taken from prelimi- nary data from the Canadian Health Information Center. Once revised, it will be published in table 117 of the catalogue 83-233 (Statistics Canada, forthcoming a) for the year 1986-1987. 12 See Saskatchewan Cancer Foundation (1987:25), and Saskatchewan Health, Medical Care In- surance Branch (1989). 13 Marginal cost and benefit are increments. Usually we assume these increments to be small. How- ever, in the present circumstances, we have no choice but to take the total cost as if it were an in- crement over 0. 14 Appendixes are available from the authors upon request. Appendix 1 gives the number of deaths according to cause and sex. It also describes the model which simulates what would have been the life and death of smokers had they not smoked and lived longer. Appendix 3 discusses the discrepancy between our 21,841 estimate of the number of deaths due to smoking and that of 35,131 from Col- lishaw, Tostowaryk and Wigle (1988). 15 From 1946 to 1990, the ex post real rate of return on 10-year Canadian bonds was never higher than 3%, except once in 1989. Indeed, it has been almost nil or even negative for approximately two de- cades, from the end of the 40s to the end of the 50s, and from the mid-'70s to the mid-'80s. Thus, over the long run, it is reasonable to believe that the maximum real rate of return on risk-free assets is not superior to 3%. Obviously, the discount rate could be inferior, but then, our conclusions would be even more favourable to smokers. 16 Additional medical services costs were found to be $68 million compared to $546.5 million for addi- tional hospital care costs which gives a ratio of one to eight. We will find in the following section that the reduction of future medical services costs is $123.5 million. Applying the ratio.of one to eight 314 Andre Raynauld and Jean-Pierre Vidal 2501357050

would lead us to think that the reduction of future hospital care costs could be as high as $988 mil- lion. 17 We took as a reference the average costs as calcu- lated by Regie de 1'Assurance Maladie du Quebec (1987). We made two adjustments: one to recon- cile the average payments on a fee-for-service basis with overall medical services, and one to rec- oncile the per capita medical service cost in Que- bec with that in Canada. 18 During 1986, the total number of old age re- cipients of residential care was established at 155,381. Assuming linear progression, this figure is derived from an interpolation carried out for June 1, between the March 1, 1986, figure of 154,502 (see Statistics Canada, 1989a) and the 158,019 figure of March 1, 1987, (see Statistics Canada,1989b:119). The breakdown of this figure by age-group was performed according to table 6 in (Statistics Canada, 1989a). 19 We first found that public sources account for 65% of the residential care facilities income by sub- stracting private financial sources (co-insurance, $539 million; supplements for rooms, $26 million; miscellaneous income, $46 million) from a total in- come of $L73 billion (Table 9 of Statistics Canada, 1989a). We then took 65% of the average daily cost of $54.40 (Statistics Canada, 1989b:119), to obtain $35.17. 20 In an appendix, which is available from the authors upon request, we explain how we obtained the number of taxpayers among the smokers who would have survived between 1986 and 2071 had they not smoked. 21 This estimate is for calendar year 1986, and has been supplied by the Department of Finance, Government of Canada. 22 The estimates of the federal excise tax as well as the federal excise duty apply to fiscal year 1986- 1987 and come from the Public Accounts (Canada, 1986). 3 The estimate of the tariff duty applies to the cal- endar year and comes from Statistics Canada (1986). 24 The figure published originally was $1,987.7 mil- lion. This figure was increased to include revenues from the general sales tax on tobacco in New- foundland and Ontario. 25 The breakdown is as follows: $13,234,590 for Old Age Security and Supplement; $7,394,088 for Canada and Quebec Pension Plans; and, $8,832,962 for private pension plans. 26 Although this approach based on averages is quite rough, it still requires more than 250 tables, which shows that a more precise estimation would have required a study of its own. Detailed calculations would certainly have to take into account the changes in the number and age distribution of beneficiaries, of spouse's allowances and of pen- sions to survivors. As well, it would be necessary to calculate the change in the amounts paid out because a member of a couple dies. But, since the average income between men and women differs, it would also be necessary to take into account that the amount offered by some programs depends on general income and on other benefits already being paid out. 27 Leu and Schaub (1983), have been criticized by Forbes and Thompson (1985). A reply may be found in Leu and Schaub (1985). 28 The form of the curve does not depend on the transformation function, which is linear, but on the etiologic fraction function (see section III). More precisely, the higher the Euclidian norm uik N, the higher will be the first derivative of the cost function (which is positive) and the higher will be the absolute value of the second derivative (which is negative). References Atkinson, A.B. and T.W. Meade (1974) 'Methods and preliminary findings in assessing the economic and health services consequences of smoking, with particular reference to lung cancer,' Journal of the Royal Statistical Society, Part 3:297-312. Atkinson, A.B. and J.L. Townsend (1977) 'Economic aspects of reduced smoking,' Lan- cet, 3:492-4. Bartlett, L. (1988) `Smoking: we cannot afford the cost,' Canadian Medical Association Journal, 138:644-5. Becker, G.S., M. Grossman and K.M. Murphy (1990) 'An Empirical Analysis of Cigarette Addiction.' Center for the Study of the Economy and the State Working Paper 61. University of Chicago, Chicago. Becker, G.S. and KM. Murphy (1988) 'A Theory of Rational Addiction,' Journal of Political Economy, 96:675-700. Bonilla, C.E. (1989) Determinants of Employee Absenteeism. Washington: US Chamber of Commerce, National Chamber Foundation. Cady, B. (1986) 'Payment by Nonsmokers for Smoking Related Illness,' Journal of the American Medical Association, 256:10:1291. - (1983) 'Cost of Smoking,' New England Journal of Medicine, 308(18):1105. Canada (1986) Public Accounts 1986-1987 (Ot- tawa). Canadian Tax Foundation. (1986-87) The National Finances (Toronto). Chaloupka, F.J. (1990) 'Rational Addictive Be- havior and Cigarette Smoking.' National Smokers' Burden on Society 315

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