cigarettes and e-cigarettes: comparison of … · 2020. 10. 26. · the government of san...

CIGARETTES AND E-CIGARETTES: COMPARISON OF LEGISLATION

ON TOBACCO PRODUCTS IN DIFFERENT REGIONS Riya Gupta , The International School Bangalore ,

E-mail: [email protected], Blog: https://riya-experiencer-for-life.com

DATE OF COMMENCEMENT: May 14, 2020

ABSTRACT

This research paper will discuss different legislations on tobacco related products mainly cigarettes and e-cigarettes in

different regions of the world and compare the effects of these legislations. These include the bill passed in India’s Lok

Sabha, UK and USA’s contrary perspectives on e-cigarettes, and special emphasis on the bill passed by Kentucky

House to raise taxes on vaping. On a general note, these bills and decisions have been taken in the recent months, and

hence, the comparison will focus mainly on the desired effects and not on the effects noticed and researched. Here,

government intervention to remove negative externalities in the economic environment plays an important role and will

be the prime focus in analysing the effect of the legislations. The sole purpose of the paper is to assess the most suitable

legislations for various environments and the intentions of the government to pass the legislation.

METHODS

The topic itself implies that this research paper heavily relies on secondary research. The references will include news

articles, speech dictations, bills and other legal documents available on the internet. Due to the COVID-19 lockdown,

primary research has not been an option available to me, however as the paper progresses I might be considering

sharing a survey to the readers.

INTRODUCTION

Tobacco products such as cigarettes and e-cigarettes have negative consumption externalities in the

market in form of addiction. Negative consumption externalities occur when there are undesired and

harmful spiller effects to a third party when a product is consumed, and for which no appropriate

compensation is paid. The addictive component in tobacco products is mainly nicotine, which is

utmost in causing this negative externality alongside tobacco, the tar causing agent in lungs.

Smoking has been the second most common source of risk factor, after blood pressure, that has

caused deaths, about 10.44 million in 2017. Overall, about 15% deaths are attributed to smoking.

“Every seventh death in the world (13%) was the result of direct smoking in 2017; a further 2% was

the result of secondhand smoke. This means 15% – close to 1-in-6 deaths was the result of

tobacco.”1

Discussing the situation in terms of externalities, consumption of e-cigarettes, cigarettes and other

tobacco related goods have a higher marginal private benefit than marginal social benefit thus, MPB

1 Ritchie, Hannah, and Max Roser. “Smoking.” Our World in Data, 23 May 2013,

ourworldindata.org/smoking.

Riya Gupta, Int. Jou Eco.& Res, 2020, V11 i5 (so), 23 – 35 ISSN: 2229-6158

IJER – September - October 2020 available online @ www.ijeronline.com

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mailto:[email protected]

https://riya-experiencer-for-life.com/

> MSB, which causes a deadweight loss2, and further causes an allocative inefficiency. MPB

3 are

the benefits enjoyed by the individual consumers of a particular good and it does not take into

account any external benefits or costs arising from a goods consumption. MSB4 are the benefits

experienced by the individual consumers of a particular good, plus or minus any social or

environmental benefits or costs. MSB can be greater than marginal private benefit (MPB) if there

are positive externalities of consumption (e.g. education) or less than MPB if there are negative

externalities of consumption (e.g. smoking). “When there is a negative consumption externality, the

free market over allocates resources to the production of the good, and too much of it is produced

relative to what is socially optimum.”5

1. INDIA: Considering Tobacco Legislations and the Effects

A. Bill Passed by Lok Sabha (House of the Commons)

Firstly considering India’s recent bill passed by Lok Sabha to ban production, import and sale of

electronic cigarettes allover India’s states and union territories on November 27, 20196, this paper

presents a discussion on the market implications of the ban.

2 Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2020. 3 MPB - Marginal Private Benefit - Econclassroom.com, econclassroom.com/glossary/marginal-

private-benefit-mpb/. 4 MSB - Marginal Social Benefit - Econclassroom.com, econclassroom.com/glossary/marginal-

private-benefit-mpb/. 5 Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2020. 6 Kumar, Chitranjan. “Cigarette Stocks Rise up to 8% as Lok Sabha Passes Bill on e-Cigarettes

Ban.” Business Today, 27 Nov. 2019, www.businesstoday.in/markets/company-stock/cigarette-stocks-rise-up-8-lok-sabha-passes-bill-on-e-cigarettes-ban/story/391148.html.



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In context to Figure 1.1 in the previous page, which discusses the reasons behind the existence of

the deadweight loss, the MPB is greater than the MSB and at the point MSB interacts with the MPC

curve, due to the presence of a negative spillover effect to an external party.

The regulations imposed by the Indian government banned e-cigarettes to correct the externality.

However, the prohibition of electronic cigarettes made the consumers who are addicted to tobacco

shift to cigarettes. The XED between the two good is high, which reveals that they are close

substitutes in this case. XED is Cross-Price Elasticity of Demand of two products. If it is high, the

two products are substitutes, if it is low, the two products are complements. It measures the percent

responsiveness of demand of one product to a percent change in price. This shift in the market force

such as rightward shift of demand curve caused the stock market to see scope in cigarette stocks and

the stocks for firms such as Godfrey Philips India and VTC industries climbed up.

The demand curve of cigarettes shifts right, which causes both the price and the quantity demanded

to increase. Tobacco is an addictive good, and is therefore relatively price inelastic i.e. PED is less

than 1. Therefore percentage change in quantity demanded is less than percentage change in price.



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The producers such as cigarette major ITC can increase its revenue by selling cigarette packs at a

higher price. This encourages cigarette stock market to flourish as people would be more likely

willing to invest as they would gain greater returns on their investment.

The reason behind ban of e-cigarettes was mainly for ensuring safety and health of the people and

reduce the health care costs due to tobacco related diseases. Some consumers who are highly

addicted to vaping, might choose illegal methods of obtaining e-cigarettes, which would create

corruption in the form of black markets and illegal trade. Not only the illegalities, but also

consumers shifting to cigarettes, which requires tobacco to be burnt, has equally harmful effects on

health and environment.

A possible solution to reduce the negative externality caused by consumption of cigarettes is to

impose a ban on all tobacco products in public spaces all over India. The state of Kerala adapted

that regulation and saw a positive difference, which I will be discussing further. Another alternative

could be increasing the tax on tobacco, or imposing a price floor on it.



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Figure 1.2 above explains the effect of imposing a specific indirect or excise tax7 on cigarettes

proceeded by the ban of e-cigarettes. After tax is imposed, the marginal social cost curve shifts left

by equal units of tax imposed, due to which, the market settles to the optimum price. The drawback

here is that it is very difficult to measure the externality and impose a tax equal to it to totally

reduce the welfare loss. In reality, the market equilibrium after tax is imposed is usually somewhere

between Q(m) and Q(opt). This further intervention of government can reduce the negative

externality caused and create allocative efficiency by moving the equilibrium to a socially optimum

quantity. But, with an enforcement of a strict law, comes some negative consequences, such as

7 Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2020.



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illegal trade in the form of black markets. In context to this, the amount of “illegal cigarettes in

India have more than doubled since 2005, making India the 4th

largest illegal cigarette market in the

world.”8

B. States of Madhya Pradesh and Kerala

Sub-national jurisdictions are allowed to enact tobacco-free laws that are more stringent than the

national law. The Indian States of Madhya Pradesh and Kerala follow a strict policy against few

tobacco products. These two states had banned manufacture, storage, distribution and sale of

‘gutkha’ and ‘pan masala’, smokeless tobacco products, containing nicotine, of all brands available

in the market in 2014. Kerala executed this from May 25, 20149. Biju Prabhakar, commissioner of

food safety in Kerala, in 2014, said “The state is seeing a situation where oral cancer cases have

tripled over the years. Around 35 to 40 lakh people in Kerala are addicted to chewing tobacco and a

large proportion of these addicts are children.” The low literacy rate of India is the reason behind

low awareness back in 2014, but since then the state governments and national government have

taken up successful campaigns to raise awareness.

The reasons behind the success of the ban was the high amount of consequence for not adhering to

it, which included a a fine up to Rs 5 lakh or imprisonment for up to six years. To measure the

standards of living for a region, health care and the death rate play an important role. Therefore, the

negative spiller effect of a high death rate can be avoided by the ‘ban’. However, the government

faces some challenges in setting up a ban. Policies such as bans require a lot of legislation and

execution. There is an execution cost behind every new policy and if awareness of the ban is not

created well, it could be completely ineffective and could backfire the government. Furthermore,

the legal bodies need to strengthen themselves to identify illegal trade and catch the culprits who

practice it. Black markets become very common as such products are addictive in nature and could

play around with a person’s psychological health.

8 “Cigarette Smuggling: Illegal Cigarette: Cigarette Industry.” TIIOnline, www.tiionline.org/industry-

issues/illegal-trade/. 9 “Kerala Becomes Second State to Ban Chewing Tobacco.” Down To Earth,

www.downtoearth.org.in/news/kerala-becomes-second-state-to-ban-chewing-tobacco-38279.



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Recently, many cases have happened where these illegal tobacco products have been found,

especially in the case of Kerala due to the high addiction rates. Despite strengthening patrol and

special drives, the rise in inflow of banned products have alarmed officials back in 2019 in the

district of Ernakulam, Kochi. “The seized quantity of banned tobacco products in Ernakulam

between January and March was 4,743kg in 2019 compared to 420kg in 2018 over the same

period”10

. This exponential growth with a multiplier of 10 says a lot about the growing concerns of

the consumption of harmful tobacco related products.

However, the ban on consumption of smokeless tobacco products in public spaces all over the 28

states of India, as well as the union territories was only implemented very recently in May 2020

itself, to avoid spread of the COVID-19 virus, as chewing such products create more amount of

saliva which urges the consumer to spit11

out the product.

C. Upcoming Legislations for Smoking

The Union Health Ministry of India has been working on the planning of the implementation of the

following two new rules in India: Firstly, legal age for smoking tobacco to be moved to 21 from 18,

and secondly, increasing the penalty, currently INR 200, for smoking at restricted areas. This will

be updated in the COTPA (Cigarettes and Other Tobacco Products Act) amendment coming soon.

[Source12

dated February 32, 2020]

Global Youth Tobacco Survey India 2009 states that 14.6% of students of 8,9 & 10 class were using

tobaccos ( Boys 19% & girls 8.3%), and hence the Indian government believes it is important to

raise the limit bar to 21. The government acknowledges the higher vulnerability of adolescent

10 Narayanan K, Anantha. “Inflow of Banned Tobacco Products Rises Alarmingly in Ernakulam:

Kochi News - Times of India.” The Times of India, TOI, Apr. 2019, timesofindia.indiatimes.com/city/kochi/inflow-of-banned-tobacco-products-rises-

alarmingly/articleshow/68946349.cms. 11 PTI. “28 States, UTs Ban Smokeless Tobacco Products, Spitting Due to Coronavirus.” The

Economic Times, Economic Times, 10 May 2020, economictimes.indiatimes.com/news/politics-

and-nation/28-states-uts-ban-smokeless-tobacco-products-spitting-due-to-

coronavirus/articleshow/75657382.cms. 12 ANI. “Legal Age for Smoking Tobacco Would Be 21 Years Soon, COTPA Amendment Coming:

Health Ministry.” The New Indian Express, The New Indian Express, 23 Feb. 2020,

www.newindianexpress.com/nation/2020/feb/23/legal-age-for-smoking-tobacco-would-be-21-years-soon-cotpa-amendment-coming-health-ministry-2107416.html.



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http://timesofindia.indiatimes.com/city/kochi/inflow-of-banned-tobacco-products-rises-alarmingly/articleshow/68946349.cms

http://timesofindia.indiatimes.com/city/kochi/inflow-of-banned-tobacco-products-rises-alarmingly/articleshow/68946349.cms

http://economictimes.indiatimes.com/news/politics-and-nation/28-states-uts-ban-smokeless-tobacco-products-spitting-due-to-coronavirus/articleshow/75657382.cms



http://www.newindianexpress.com/nation/2020/feb/23/legal-age-for-smoking-tobacco-would-be-21-years-soon-cotpa-amendment-coming-health-ministry-2107416.html

http://www.newindianexpress.com/nation/2020/feb/23/legal-age-for-smoking-tobacco-would-be-21-years-soon-cotpa-amendment-coming-health-ministry-2107416.html

students due to peer pressure and other such psychological factors, and hence has been planning to

implement these new rules.

2. E-Cigarettes vs Cigarettes: United Kingdom and United States of America

Considering the recent controversies regarding which one is safer, healthier and creates less

negative externality, between two tobacco and nicotine products - cigarettes and e-cigarettes (vapes)

- this article discusses the effects of different legislations for the same in respect to two different

countries - UK and USA. The article13

I am focusing on analysing mainly debates whether e-

cigarettes are reducing harmful smoking effects or creating more nicotine addicts by comparing the

viewpoints of different organisations and governments. Some important concepts in the discussion

are XED (Cross-Price Elasticity of Demand) and PED (Price Elasticity of Demand) of highly

addictive demerit14

goods.

A. Claim 1: E-cigarettes have a lesser negative externality

Public Health England claims that “vaping is 95% safer than smoking tobacco”. The United

Kingdom uses e-cigarettes as a source to reduce consumption of cigarettes which have a greater

external cost. Cigarettes and e-cigarettes are close substitutes and have a positive XED, which helps

the UK to reduce external costs and bring MPB towards MSB, which further causes a reduction in

welfare loss. Even though vaping has its own external cost, it is way lesser than that of vaping and

is therefore useful to get addicts of nicotine to reduce harmful effects of consumption of tobacco.

13 Boseley, Sarah. “The Great Vape Debate: Are e-Cigarettes Saving Smokers or Creating New

Addicts?” The Guardian, Guardian News and Media, 18 Feb. 2020, www.theguardian.com/society/2020/feb/18/the-great-vape-debate-are-e-cigarettes-saving-smokers-or-creating-new-addicts. 14Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2020.



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In Figure 1.2 below, Q* and P* represent the market price and quantity after smoking addicts shift

to vaping. As this new market equilibrium, where Q* < Q (m), the allocative inefficiency is

reduced. The deadweight or welfare loss is also reduced from the triangle shaded dark grey in

Figure 1.1 to the triangle shaded in Figure 1.2 in pink. This decrease in deadweight loss and

allocative inefficiency is only possible if consumers consider vaping as an alternative or very close

substitute to smoking.

B. Claim 2: Cigarettes have a lesser negative externality: USA

The government of San Francisco, USA, reports high addiction to nicotine among adolescents

because of vaping, which is considered an “epidemic”. Because of high addictive content of

nicotine, the price elasticity of demand of e-cigarettes is relatively inelastic, i.e., the percentage



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change in quantity demanded is less than percentage change in price. More inelastic the demand

following a change in price, steeper the slope of the demand curve. Seen in Figure 1.1 below, the

demand curve is steep as the demand of cigarettes and e-cigarettes is inelastic due to its highly

addictive nature.

In figure 1.1, the demand curve is steep because of the low PED. The market price P(m) and

quantity Q(m) is found by the intersection of the MPB and MPC curves, whereas the social

optimum price P(opt) and Q(opt) is found by the intersection of MSB and MSC curves. The

resources are over allocated as Q(m) > Q(opt). At Q(m), MSC > MSB, which is another proof of

existing allocative inefficiency.

Now, the reason behind the claim that cigarettes have a lesser negative externality is due to its

higher addictive nature and higher influence on teenagers especially high school students. The



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option of ‘vaping’ is more intriguing to students these days and has created higher externalities in

terms of addiction and health among the adolescents of USA.

C. Personal perspective in terms of short and long run

These controversies of vaping and the legislations imposed vary all over the world. In the long run,

USA’s argument is better as the nicotine in vaping might get the consumer to lead to smoking

cigarettes ‘sooner or later’. However, in the short run, UK is using vaping as a weapon to aid giving

up smoking. The e-cigarette manufactures create such flavours that excite the youth, and the

president of USA, Donald Trump, has imposed a temporary ban on those flavours. However, this

ban could create black markets and increase illegal trade of such flavours due to its high addictive

nature. Consumers could also simply shift to cigarettes which have a greater externality due to

smoke and tar.

3. Kentucky, USA

The article15

I am mainly considering discusses the bill passed by Kentucky House to raise a tax

from 15% to 25% on e-cigarettes and other tobacco products. As explained in Figure 1.1 under

Section B of the research paper, a deadweight loss is created due to MSB < MPB, as a consumption

negative externality exists in this market system. To remove this negative externality tax is

introduced. A raise in the tax percentage is mainly due to the reasons that the negative externality is

not being reduced as initially planned, and the demerit good which was targeted at for reducing its

consumption, did not have as great of a negative effect on its sales as planned.

In Figure 3.1 on the following page, to achieve optimum quantity (Q at the intersection of MSB and

MSC curves), S1 is shifted upwards by units equal to tax. This intervention of the Kentucky

government causes the market to allocate at Q(opt), though at a higher price, which raises the tax

revenue by $50 million over the next two fiscal years. An important concept here is ad valorem tax.

As compared to the diagrams under Section A, Figure 3.1 has tax which causes an unparalleled shift

to the supply curve. This is due to ad valorem tax being a tax added as a percentage tax to the price

of the product, instead of a fixed tax price.

15 Sonka, Joe. “Kentucky House Passes Bill Raising Taxes on Vaping, Tobacco Products.”

Journal, Courier Journal, 26 Feb. 2020, www.courier-

journal.com/story/news/politics/2020/02/26/kentucky-house-passes-tax-increase-vaping-tobacco-products/4882429002/.



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http://www.courier-journal.com/story/news/politics/2020/02/26/kentucky-house-passes-tax-increase-vaping-tobacco-products/4882429002/



The tax revenue is calculated by [P(c)-P(p)]*Q(opt), where P(c) is the price paid by consumers and

P(p) is the price received by producers. It could be utilised to organise awareness campaigns about

the negative spillover effects of e-cigarettes to further reduce the consumption. Due to the addictive

nature of e-cigarettes which causes the demand curve to be steep, the tax revenue is high and could

be utilised government with providing subsidises to merit goods. However, it is very difficult to

calculate the amount of tax to be imposed which is equal to the externality, therefore the result of

the tax imposition might be the supply curve shifting towards the optimum supply curve and thus,

producing quantities virtually equivalent to Q(opt). In other words, the MPC curve shifts towards

the optimum and does not overlap it. However, the main advantage is that the externality gets

internalised by excise taxes.

This idea is often criticised for the belief that consumers could shift to cigarettes, a close substitute,

which have a greater negative externality due to smoke and tar. The reason behind this raise in tax

of e-cigarettes was mainly for ensuring safety and health of the people and avoid tobacco related

diseases. Some consumers who are highly addicted to vaping, might choose illegal methods of

obtaining e-cigarettes, which would create corruption in the form of black markets, illegal trade and

tax evasions. The bill in the article, however, has a drawback as it does not increase the tax rates for

cigarettes which have greater externalities.



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As a whole, Kentucky’s government will be successful in reducing the marginal social costs and

bringing the quantity of e-cigarettes nearing the optimum, along with internalising the externality.

To iron out the drawbacks, regulations such as prohibiting e-cigarettes in public places can also be

very effective.o achieve optimum quantity (Q at the intersection of MSB and MSC curves), S1 is

shifted upwards by units equal to tax. This intervention of the Kentucky government causes the

market to allocate at Q(opt), though at a higher price, which raises the tax revenue by $50 million

over the next two fiscal years.

References:

I. Boseley, Sarah. “The Great Vape Debate: Are e-Cigarettes Saving Smokers or Creating

New Addicts?” The Guardian, Guardian News and Media, 18 Feb. 2020,

www.theguardian.com/society/2020/feb/18/the-great-vape-debate-are-e-cigarettes-

saving-smokers-or-creating-new-addicts.

II. Kumar, Chitranjan. “Cigarette Stocks Rise up to 8% as Lok Sabha Passes Bill on e-

Cigarettes Ban.” Business Today, 27 Nov. 2019,

www.businesstoday.in/markets/company-stock/cigarette-stocks-rise-up-8-lok-sabha-

passes-bill-on-e-cigarettes-ban/story/391148.html.

III. Luetjens, Joannah, et al. “Successful Public Policy: Lessons from Australia and New

Zealand.” JSTOR, 1 Jan. 2019,

www.jstor.org/stable/10.2307/j.ctvh4zj6k?refreqid=search-

gateway:31b11fc16173ec034dbcb3fe25d49a55.

IV. Novotny, Thomas E, and Feng Zhao. “Consumption and Production Waste: Another

Externality of Tobacco Use.” Tobacco Control Bmj, vol. 319, no. 7201, 1999,

doi:10.1136/bmj.319.7201.3a.

V. Sonka, Joe. “Kentucky House Passes Bill Raising Taxes on Vaping, Tobacco Products.”

Journal, Courier Journal, 26 Feb. 2020, www.courier-

journal.com/story/news/politics/2020/02/26/kentucky-house-passes-tax-increase-vaping-

tobacco-products/4882429002/.

VI. Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2020.



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