Improving Cost-Benefit Analysis of Tobacco Regulation

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DESCRIPTION (provided by applicant): In November 2010, the Food and Drug Administration (FDA), in its first significant attempt to regulate tobacco in more than a decade, proposed regulations requiring graphic warning labels on cigarette packages. Like all major rules, this one was accompanied by a legally required regulatory impact analysis enumerating the rule's costs and benefits. This regulation was, not surprisingly, met with immediate opposition from the tobacco industry, including pointed criticism about the method that FDA used to value the lost consumer surplus associated with reductions in smoking - that is, smokers' foregone enjoyment. In the analysis accompanying the final rule issued in August 2011, the FDA used a compromise method to value lost consumer surplus and estimated that it would offset between 76 and 93 percent of health benefits to smokers associated with the regulation. This regulation has not yet taken effect because of an ongoing legal challenge. Whether or not this particular rule withstands judicial scrutiny, any future attempt to regulate tobacco at the Federal level will have to provide evidence that health benefits outweigh costs-including the foregone enjoyment of smoking. Given the size of the FDA's estimate of the foregone enjoyment relative to the health benefits of the smoking regulation, an accurate method for valuing lost consumer surplus is essential to the effective regulation of tobacco. The methods currently used by FDA do not have a sound theoretical or empirical foundation, and this issue is simply too important not to get right. Therefore, we propose to address the question: how should the FDA estimate the value of smokers' lost consumer surplus-that is, foregone enjoyment- associated with regulation-induced changes in smoking?