Question

Smokers impose negative externalities on nonsmokers. Suppose the air in a restaurant is a resource owned by the restaurant owner. a. How would the owner respond to the negative externalities of smokers? b. Suppose the smokers owned the air. How would that change matters? c. How about if the nonsmokers owned the air? d. Finally, consider what would occur if the government passed a law banning all smoking. How would the outcome compare with the outcomes described above?

Short answer

Answer: In each scenario, the negative externalities of smokers affect nonsmokers differently. In Scenario A, the restaurant owner tries to balance the needs of both groups by creating segregated spaces, reducing the impact on nonsmokers. In Scenario B, smokers are less concerned about the effects on nonsmokers, which leads to a more smoker-friendly environment and increased negative externalities for nonsmokers. In Scenario C, nonsmokers exert more control, resulting in more restrictive smoking policies that reduce negative externalities. Finally, in Scenario D, the government bans smoking, which eliminates the negative externalities in the restaurant for nonsmokers. Among the four scenarios, Scenario D provides the most benefit to the nonsmokers.

Step-by-step solution

Scenario A: Restaurant owner owns the air

In this scenario, the restaurant owner would need to consider the well-being of both smoking and nonsmoking customers. To minimize the negative externalities of smokers affecting nonsmokers, the owner might create designated smoking areas or separate smoking and nonsmoking sections within the restaurant. This would allow smokers to continue patronizing the establishment while reducing the impact on nonsmokers.

Scenario B: Smokers own the air

If smokers owned the air in the restaurant, they may be less concerned about minimizing the negative externalities on nonsmokers. In this situation, the restaurant may become a more smoker-friendly environment, with smoking allowed throughout the establishment. The result might be that nonsmoking customers become less frequent patrons due to the increased negative externalities (such as secondhand smoke exposure).

Scenario C: Nonsmokers own the air

If nonsmokers owned the air, they would be more likely to prioritize their own well-being and may choose to implement more restrictive smoking policies within the restaurant. This could include creating even smaller designated smoking areas, requiring smokers to go outside to smoke, or even banning smoking altogether. The reduced negative externalities for nonsmokers may increase their patronage at the restaurant.

Scenario D: Government bans smoking

If the government passed a law banning smoking, the negative externalities from smokers on nonsmokers would be eliminated within the restaurant. This would benefit the nonsmokers who no longer experience secondhand smoke exposure, but it would negatively impact smokers who could no longer smoke at the establishment. Comparing this outcome to the previous scenarios, the nonsmokers benefit the most in this situation, while the smokers may be more inclined to find other places where they can smoke.

Key concepts

Externalities in Economics

When we talk about externalities in economics, we're referring to the side effects or consequences of an economic activity that affect other parties without this being reflected in the cost of the goods or services involved. These can be positive, such as the pollination of neighboring crops by bees kept for honey making, or negative like pollution from a factory affecting the health of nearby residents. Negative externalities often result when personal or corporate activities impose a cost on society that are not accounted for by the price of producing or consuming a product or service.

In the case of smoking in a restaurant, the negative externality is the secondhand smoke that non-smoking patrons and employees are exposed to. This isn't something that's typically included in the cost of doing business or the price of a restaurant's meal. Yet, it can have serious implications for the health and comfort of nonsmokers. Economists often suggest that negative externalities should be corrected by government intervention, such as a tax on goods or services that generate the externality, or regulations limiting behaviors that cause them.

The economic concept of externalities is crucial to understanding the potential role of public policy in addressing such issues. By considering the indirect costs and benefits associated with economic activities, policymakers can create more efficient and equitable market outcomes.

Smoking and Public Policy

Smoking is a classic example of a negative externality in public places because it can impose health and comfort costs on bystanders. Public policy plays a vital role in managing the adverse effects posed by smoking. Governments can intervene by establishing no-smoking areas, levying taxes on tobacco products, or even banning smoking in public spaces entirely.

The idea is not only to protect non-smokers from secondhand smoke but to reduce the societal burdens caused by smoking-related illness. If, for example, restaurant owners decide to allow smoking, policymakers can impose regulations requiring separate spaces or advanced ventilation to minimize the impact on non-smokers. Each of these approaches reflects different understandings of rights and different strategies for resource allocation.

Regulations that limit smoking in shared spaces represent a collective decision that the right of individuals to breathe clean air outweighs the smokers' right to smoke wherever they choose. Such public policies can be influenced by various factors, including health data, public opinion, and economic considerations, with the ultimate goal of either reducing the negative externalities or compensating those affected by them.

Property Rights and Resource Allocation

Property rights play a central role in resource allocation and are deeply connected to how externalities are addressed. They determine who has control over resources and how those resources can be used. When property rights are well-defined and enforced, it is easier for market transactions to occur and for parties to negotiate the use of resources in ways that minimize negative externalities.

In the textbook example, the scenarios describe different allocations of property rights concerning the air in a restaurant. If the restaurant owner has the property rights, they can decide whether to cater to smokers, non-smokers, or both, and potentially invest in ventilation or create designated smoking areas. Conversely, if non-smokers are granted property rights, they're likely to restrict smoking to protect their health, essentially prioritizing their own interests in the clean air.

Properly assigned property rights can also lead to market-based solutions, such as bargaining between parties. However, when it’s not feasible for individuals to negotiate (perhaps due to high transaction costs or impracticalities), government policies often step in as an alternative solution to correct the inefficiencies caused by externalities. This underpins the principle of 'Coase Theorem', suggesting that under certain conditions, parties will reach an efficient outcome through negotiation, provided property rights are established.