It is always exciting when consumer surplus makes the headlines:
Rarely has the concept of happiness caused so much consternation in public health circles.
Buried deep in the federal government’s voluminous new tobacco regulations is a little-known cost-benefit calculation that public health experts see as potentially poisonous: the happiness quotient. It assumes that the benefits from reducing smoking — fewer early deaths and diseases of the lungs and heart — have to be discounted by 70 percent to offset the loss in pleasure that smokers suffer when they give up their habit.
Experts say that calculation wipes out most of the economic benefits from the regulations and could make them far more vulnerable to legal challenges from the tobacco industry. And it could have a perverse effect, experts said. The more successful regulators are at reducing smoking, the more it hurts them in the final economic accounting.
“This threatens the F.D.A.’s ability to take strong actions against tobacco,” Frank J. Chaloupka, an economist at the University of Illinois at Chicago, said of the Food and Drug Administration. “If they can’t demonstrate that there is a significant economic benefit to doing it, then it makes their job much harder.”
On Wednesday, Professor Chaloupka and other prominent economists, including a Nobel Prize winner, publicly took issue with the analysis. In a paper submitted to the F.D.A. as the period for public comment on the regulations neared its end on Friday, the group said the happiness quotient was way too high and should be changed before the regulations take effect.
“There’s reason to believe that number is much too big,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who was an author of the paper. In his view, the agency’s analysis cited his past work erroneously.
The idea of lost happiness is new for health regulation. But it has surfaced as part of a longstanding requirement — first codified under President Bill Clinton — that every set of federal regulations with more than a $100 million effect on the economy needs an analysis to prevent the adoption of regulations with high costs and low benefits.
The cost-benefit analysis is embedded in a proposal from April that would extend the F.D.A.’s authority, for the first time, to electronic cigarettes and other tobacco products such as cigars and pipe tobacco, with potentially large consequences for the multibillion-dollar tobacco industry.
Here is the issue from the executive summary of the report at tobacconomics.org (tobacconomics.org?):
The most critical concern about FDA’s cost estimation is the agency’s reliance on lost consumer surplus as a cost of smokers’ quitting in response to the GWLs. We describe in detail why the notion of consumer surplus, predicated on well‐informed rational behavior, does not apply in this instance in which the vast majority of smokers begin smoking, and become addicted, before the age of majority. These smokers have imperfect information and, in particular, insufficiently understand the power of the addiction to nicotine when they start smoking. Almost uniformly they believe that they will not be smoking five years later, when in fact the vast majority are. We discuss the applicability of such notions as the principle of insufficient reason, present bias, and projection bias, and consider the relevance of self‐control problems documented in the literature. For reasons we give, most smokers induced to quit by the GWLs will conclude that they have achieved a large net benefit.
My benefit-cost analysis class starts in about two weeks. I'll have this one loaded up for day 1!