This article outlines that Guernsey prison has put a ban on smoking within prison grounds. This is to prevent the negative effects of passive smoking. This passive smoking is the damaging effects to a third party due to an individual’s actions, economically known as a negative externality. This means that there is an external cost that must be added to the private cost of the producer or consumer to reflect the full cost to society. This is shown in diagram 1. With this negative consumption externality, the Marginal Private Benefit (MPB) is not reflecting the social benefit and thus the Marginal Social Benefit (MSB) lies below MPB. The vertical difference between MPB and MSB is the negative externality. The optimal level of consumption is where MSB=MSC i.e. Q. However the negative externality is being ignored and thus there is an over consumption of the goods at Q1. Due to this externality, market failure occurs and this means that there is an inefficient allocation of society’s resources. The government will act to reduce or eliminate the negative externality with the use of a ban.
Although this ban is within a small proximity, it would still have an effect upon the tobacco industry in terms of shareholders and employments. The ban would be highly beneficial to the environment and to society; it would reduce healthcare costs considerably. Governments however make a lot of revenue by taxing cigarettes, which have price inelastic demand, because they are habit forming. It must also be remembered that governments need votes and in the long run smokers are not likely to vote for a government that bans smoking.
The article also mentions that the use of electronic cigarettes is allowed as a substitute. This causes a shift of the demand curve for these electronic cigarettes. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. In this case it is because electronic cigarettes are the only type available for consumption. This substitute good is therefore increasingly demanded. As shown on Diagram 2, the original equilibrium of electronic cigarettes is at PQ. Increased demand results in a rightward shift of the demand curve. This results in an increased price and increased quantity output. The new equilibrium is set at P1Q1.
The increased demand causes a need for increased supply, meaning more jobs may be available in that industry. The more jobs provided may be to the advantage of some individuals, but is at the cost of those in the tobacco industry who face unemployment. Increased demand of electronic cigarettes is due to the decrease in demand of tobacco cigarettes, owing to their unattainability. This decrease in demand also has an effect on the tobacco industry in terms of shareholders and employments, but due to the small scale of the decrease, it’s a minimal effect. Therefore the ban would be effective but its negative effects outweigh the positive and wouldn’t be worth it in the long term.