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LAUZONIS SOCIOECONObuc
BALANCESHEET
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BATCo document for Province of British Columbia 19 April 1999

SBT BY: IXPERI.;L TOBACCO LTD S- 1-94 16:40 XARKE71N'G H-4- WT
A Critique of Le'o-Paul Lauzon's
Socioeconomic Balance Sheet
Jean-Pierre Vicw, Ph.D.
Trandation by Judith Banum, C.Tr.
My 1994
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Contents
introduction
I Social profitability 1
2.1 The consumer's surplas2
2.2 Economic rent 3
2.3 Txxos- 3
2.4 Fcanamic spinoffs 3
3 Costs 5
Conclusion 7
Referenc" 9
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Introduction served as a model for many others,
including the study by Health and
Wo-Paul Lauzon [41 recently made Welfare Canada (3].
public his study titled A nalysc
socia4conornique : Ilindusgric du iabac The purpose of this literature, which 13
(1987 d 1993). Section 6 of the study
deals with the socioeconomic balance frequeatly covered by the media, is to
&beet. In it, the author concludes: &sees& the more or less hidden can of
tobacco use and make them known. To
Despite the generosity we that and, the authors take into
showed in our chart on the consideration the loss of personal income
tobacco industry, ultimately as a result of premature death,
this economic activity has & hospitalization costs, the cost of medical
significantly negative impact on services and I*&= due to forest Arm.
the community. Manslatioul Never has any study in the literature
been interested in finding out if tobacco
The following criLIque will demonstrate production is of any use to our society,
that the method used by Law= !A his an issue involving something quite
analysis does not a3low for such a general different than adding up lost income and
conclusion. health costs.
1 Social profitability' In order to determine whether society
bendts from a particular economic
To due, there has been no study activity, we simply have to follow the
attacking the social profitability of rules of the cost-bonefit analysis (51; it
tobacco production in Canada.' matters little whether we're discussing
No research has sought to fwd out the usefulness of a bridge or of the
whether the economic activity itself Wu tobacco industry. This analysis differs
of benefit to the community, makers and from the one taught in faculties of
nonsmokers included. Instead, udng the admisiaragan in that iu main objective
methodology proposed by Rice [91, most is not to determine the private
authors have been content to assen the prolltabillty a( a particular activity, but
leemomic impact' of tobacco use. In rather Its social profitability. It therefore
Canada, Shillington 1101 has estimated must consider all costs and all benefits,
the cut at about 31.5 billion, while including those that are difficult to
CoWshaw and Myers (2) have suggested a measure. such -ax the costs and benefits
Ague of SM billion. These works have for the people who am lot involved in
101m sack nady W been dome for Australiadecisions related to production and
consumption.
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2
2 -Benefits
According 10 UU202 (41, the tobacco
Industry generates
1. taxes;
2.investmout:
3.direct ani indirect jobs.
These benefits do not correspond
exactly with the type of bettefits one
would need from a cost-benefit analysis,
in order to determine whether & Society
would ultimately win or lose from the
9cononlic activity of the tobtcco industry.
2.1 The consumer's surplus
The primary benefit of the production
of tobacco products is not to bring in
sales or income taxes, nor to encourage
investment, nor to create loss. In fad.
the principal benefit is to satisfy tobacco
consumersi Tho rGUonizL9 in 11-144@ anli
can be clearly understood using coal as
an example, The purpose of the coal
mines in Eugla-ad is not to create jobs,
allow for investment at colled text&
Coal mines am there to Produce &
Material for which there is a deman(L lf
nobody needed coal, there would be no
need for coal mines.
Every individual decides how much he
or she is prepared to spend to satisfy a
particular 2*ed. That amount roPmauts
the value the individual places 400
satisfying the ztftd.a
350cme peopio Night AC92a thALL tolso".0 mm
In the specific cue of tobacco, we
could say that if a smoker is ptepared to
pay $10 for a. pack of cigarette, then for
that person, satisfying the need for
cigamtes is worth at lout $10, even if he
or she is paying only 33 a. Pack. The ST
diferewA is a beaeftt we call the
cartsurngr's Surplus.
In his famous introductory manual to
the cost-benefit amalysis, Mishan [5, p.
241 rates the con3uMer'S surplus as
fo":
This tonsumer's surplus is
the most cmcial concept in the
measurement of social benefits
in any social cost-benelit
calculation.
When studying a whole industry,
Mishan explains that:
JTJ1Le emnamist engaged in a
cost-bensit calculation has to
go beyond a simple price times
gigsatity measure of the benefits
arising from ihe products of
services of a ProJeCt. lust"d. bc
makes use of the area. trader the
entire edemas paribus, demand
curves
Nothing could demonstrate mote
clearly that if the consumer's surplus Is
not taken into account in a cost-benefit
analysis, then the conclusions must
vall
necessarily be In d'
doo @et qJJ&WY M L 11"d- SUCk M P"U" is
valid ledgemot that Ure&6 elm of *0
Manogniss's bami't rude, LIL not to judge 94her
poupi", prVicte",ft.
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2.2 Economic rent 2.3 Taxes
In a cost - benefit analysis, indirect
taxes are taken from the consumer's
As we have just seen, it is important to surplus that would necessarily exist if
consider the difreren" between the value there were no such taxes. They
consumers place oil satisfying a. need and constitute a. benefit th" is transferred
the price they actually pay to do so. from tobacco consumers to all Canadian
Similarly, we must consider the difference citizens via, the government.
between the minimum wage thiLt would This bienefit appe&m to be grossly
be necessary to keep a factor of underestimated by Lauzon. The figure he
production on the job, and the wage the gives under "Taxes and duties paid' is
person actually receives. This difference $1.9 billion for 1987 and $3.2 billion for
is referred to as economic rent. In the 1992, whereas we know that the rcal
case of the consumer's surplus, the person Apra is closer to $4 billion for 1986 (as
pays less than the limit set for satisfying shown in Table 1) and about $7.2 billion
the need. When it comes to the rent, the for I M.3
person is paid mom than the minimum it is also Important to consider the
he or she would accept before quitting. direct income taxes paid by the tobacco
companies. Such tam take a part of
Normally, when dealing with a whole what would otherwise be the
industry, we cannot assume th&t renU shareholders rent and trander it to all
are negligible. They may in fact be citizens via the vNernment. Lautoo has
substantial, for both workers and correctly considered these taxes as &
shareholders. benefit, although we have not verified
In his study. Laazou has chosen to whether Us figures are plausible-
consider the wages paid by the z0bacco
industry as a benefit. Tla choice is not 2.4 Economic spinoffs
presented as au approximation dwigned Lauzon adds to his list the investments
to simplify the calculation of the rent the tobacco industry maku in Canada,
paid to warkws considering the whole well as the economic spinoffs for
wage as a benefit would be a considerable as es and convenience stores.
overestimation. We must therefore gro
assume that this is an error an Lauzons The issue of economic spinoffs is
part, a theory thax is strengthened by the delicate and ]ends itself "y to
fact that the mat portion on eacninp an controversy. Compated to structural and
capital Is aot included among the 3F*c 1992, Peat Marwick Stowmm and
benefits, and because the rs"Gr is giv*n K.UM [6) atimued fed" taxes &L $4 Was
no explanation to justify the I . Lad proviscial t&Z" at 13 bsWaiL
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Table 1: Tam and dutles catlected in 1988
Federal Wm- (in millions, of S)
Federal Sales Tax 2T7.3
Excise Tax
(dg-)
(Cithrettal) 1
49.1
1 107.5
Ucise Duty
(cigan) 1.6
(Cilawt-) U2.1
(tobacco) U4
652.6
Custowd Duties
(led wbacco) 3.0
(mi-efactand tckam@ 1.8
(cisals) 0.3
(Cigacctles) 5.9
Provincial Tax"
Newfbandl--d 38.7
Prim" Uward We" LS
HOW& Soctla. 72.4
Now ersee"ick 0-3
Quebec GM2
Ontario 733.s
Manitoba $1.9
Saskatchewan ?&I
Alberta U0.3
British Columbia 312.2
Yabou 2A
Northwest Territories 4.7
2 119.1
4 OUj
Sow= Rayssuld and Vidal (7)
M. B. Total& may diffm due to rounded off figuns.
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SE.NT BY: ( XPER LAL , I LM 16:43 YuMETM H-4- VT INTEL::17120
frictional Unemployment, cyclical
unemployment is not as high an people
tend to believe, and new investments do
not necessarily result in a reduction in
the number of unemployed.
Without entering into the controversy
and regardless of one's position on
unemployment, we may nonetheless state
that the figures on economic spinoffs we
substantially overestimated. In order to
correctly take into account the
phenomenon of cyclical unemployment in
a cost-benefit analysis, it would have
been necestary to adjust the worker's
opportunity cost in terms of
1.the probability of hiring an
unemployed person;
are, by definition, net benefits. However,
the wernal cDsts must WU be calculated.
It it is true that tobacco is hazardous
for human health, then the decision to
smoke results in costs to government,
which covers hospitalization and health
can. Additional losses are incurred 4y
the negligence of those smoke" who
cause fires. Since these costs are usumaod
by individuals who had nothing to do
with the decision to consume or produce
tobacco, we WI them external cosm 4
Generally speaking, these external,
costs which are not taken into account in
analyses of private projects must be
explicitly considered when a. project in
being assessed from the standpoint of
society. Lau= is therefore absolutely
2.the minimum wagn this unemployed correct in raising the issue. However, the
person would accept; and following statement, which appears on
pap 21. is nothing short of astounding:
3.the probable length of time this
person would have remained without Cigamts smoking generates
work. tremendous health care costs
every yfuv. Them costs, which
Lawton obviously has not made thus are related to the treatment of
Calculations, nor does be explain Why he cancer, cardiovascular diseases
did not follow the standard methodology. and other problems directly
relaud to smoking, must be
3 Costs assumed by our public hospital
system, resulting in an annual
The tobacco industry uses a, number of bill of 39.7 billiou for
resources that an tot "able for use government to pay. In fact,
e6ewhere it the economy. According to these costs &re then passed on
the approach to which we referred for to all Quebec and Cas;tdlan
calculating beselts, the private cost of taxpayers ViL the fi!LaDCiAg Of
r*&ourcu is almdy taken into account, 'External ccists an Jones caded social
since we have considered the consumer's coats. wiLich is iacorrea. The mdal ccat is Lb*
surplus and rent as benefits, and these gm a of all intemLL (private) md exLaxal =stL
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the public deficits. ITransixtioul
The statement is astounding because
the $9.7 billion paid by government and
passed on to the taxpayer is not a.
plausible figure.
According to Martin Poirier, Lauzon's
research assista,at. this figure Wu
obtained over the telephone from Richard
Lenard, director of public health at the
R*e de la, sant,6 et des servim sociaux
de I 3
In any casa, the nature of the source
I*&& as to believe that a considerable
proportion of the $9.7 billion figure that
Lauzou used for health costs 'passed on
to an taxpaytn' is actually revenues lost
by certain smokers du* to diseases such
as lung cancer or to premature death.
The figure obviously comes from a study
that used a methodology similar to that
of Shillingtom [101 or Collishaw and
Myers t2j, the purpose of which is to add
up all the more or less hidden costs of
tobacco use, without distinguJishing
between private or external conu. And
yet, earnings lost by smokers who die
prematw*iy an a cost for neither
government nor the taxpayer.
Of course, one could always say that
people who get cancer because they
smoke am not contributing to our society
and that their lost e"np am a loss to
us &U, but that is incorrect. These people
'A& Lim time this critique Wm being Writua,
Mr. Lessard was *a vacation and we were unable
to 44termise the Original, wurce. . whick thbaw
Love appeared as a rekseace in Lausea's study
in the first place.
may not work as much Ls others during
their lifetime. but they also will not be
paid for work they do not do. We are
simply talking about money that some
smokers could have earned if they bad
worked, but did not earn because they
did not work. These "lost" earnings in
themselves cost the taxpayer nothing and
nobody is any the richer or poorer
because of them.
In the Collishaw and Myers study [21
based on 1979, lost earnings accounted
for 77% of the total cost reported. Of a
total $5.2 billion in 'consequences'
attributed to toba= mm, health costs
were not more than $1.2 billion. In a
preliminary document by Heath and
Welfare Canada 13) based an 19M, the
proportion ' varied between 73% and 81%.
depending on the rut at which future
earnings had been discounted. In that
study, , health-reiLted expenditures were
estimated at $2.9 biMan, while the
ldcoltsequences' Apra varied between
SLI.5 Mon and 115.9 billion.
Calculations by anti-smoking groups
generally include lost earnings. However,
regardkss of whether we're talking about
lost earnings, pain or other
disadvantages, we must remember that
the health risks related to smoking are
well known and that smokers conside
them when they determine the value of
satisfying their need. Indeed, these lost
earnings should not be deducted from the
benefits that may be related to tobam
production, simply because they am
already excluded from the consumer's
surplus. RAekit and Wang [8, p. 41
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explain it well: added up as social benefits are not always
benefits, and the most significant bnefits
note are or may be hazards am not included. In addition. them is no
associa,ted with smoking. Yet explanation why the tax figum am
(some) individuals express a. anderestl=t*d by half. Lastly, health
preference for smoking as costs an estimated at $9.7 billion,
revealed in the existence of whereas Redth and wewe Canada
market demand. Any demand provides a. lpre_ at 12.9 billion, and the
curve discovered In the market only refereaco offered for the 39.7 billion
place will reveal the s= of figun is a telephone convmatlon.
people's individual preie-eum,
given their subjective
perceptions of, knowledge of and
attitudes to risk.
Diagrammatically any such
demand curve will be closer to
the origin than It would have
been absent such hazards. That
is, any measured not bendu
will already have diawunttd the
hazards associated with
smoking.
Finally, we should mention that
anti-smoking groups rarely consider the
reduction in health costs resulting from
the premature death of certain smokm;
and yet, this calculation must be ma& in
order to avoid serious error. A person
who dies of lung cancer at age 70 wM not
be hospitalized later with another disease.
Conclusion
Lawton's main conclusion, Le. that
tobacco production has a largely negative
impact on society, is in no way proved by
kis analysis. In general. he disregards the
appropriate methodoloo. Tie figures (Voodoo 1.4. MJOA/29)
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[11 ACIL Economics and Policy. 16(i):1-12, 1992.
Smoking; Coas and Denefai for (9] D. P. 11ce. Estimating the cost of
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US D*p. of Health, Education and
(2) N. E. Coffishaw and G. Myers. Welfare, 1966.
Dollar estimates of the consequences (101 E. IL Shillington. Selected ecouamic
of tobacco use in cajt&da. Can"Non
Journal of'Public Icahn, consequences of Cigarette smaking.
75; 192-199, 1984. Health and Welfare Canada,
Gcvor=eut a( CanadL. 197T.
(3) Health and Welfare Canada.
Ecozon'Lic cost of tobacco use
(dralt). Government of Canada,
l9n. Ottawa.
(4) Uo,-Paul Lauzon. Analyse
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tzbac (1987 L 1993). Dipartement
des. sciences comptables, UniveraitA
du Quibec L MonrHal, mai 1994.
(31 E. 1. MiShIZ. C4Wt-bCnefd SnalyjiL
Allen and Unwin, London, 1971.
[6] Peat Mazwick Stevenson and
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Parker, March 1992.
CT) Andri Raynauld and Jean-Pierre
Vidal. Smokws'burdez on society-
Myth and reality in Canada.
Camtdian Public Policy,
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(81 W. D. Reekie, and L. F. S. Wang.
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smoking-& state dependent
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