Wednesday, March 12, 2008
Externalities 101: Cigar Smoke
To demonstrate a point in class today I brought in a cigar (not just any cigar, but a Dutch Masters Grape Flavored one, retail price $1.25). I told the class how I wanted to pay $2 for the cigar, but bought it for $1.25, so I gained 75 cents worth of surplus. So to enjoy the surplus I needed to light the cigar and smoke it. I took out my matches and asked if anybody cared.
Apparently, my students do not like the smell of Dutch Masters Grape Cigars. These negative effects experienced by students are called negative externalities, that is they didn’t buy or sell the cigar yet it had a negative impact on them.
In many places of work including my University, Towson, it is illegal to smoke. Standard economic theory suggests that instead of bans we should allow people the right to pay off other people to smoke (or pay people not to smoke). This works well if there are low cost to these types of payments. But, there is a benefit to these bans. Some NBERs papers suggest that smoking bans, lower smoking rates (here), which may improve public health, although it may increase teenage smoking (here), and certainly improves the odor fellow bar partons.
Even Fidel Castro is behind smoking bans.
Luckily, this being a fictitious example I did not have to smoke the grape cigar, but it still left a grape taste in my mouth. What I do for my students.