BURNING ISSUES IN THE TOBACCO SETTLEMENT PAYMENTS - AN ECONOMIC-PERSPECTIVE

The tobacco settlement does not appear to achieve the efficiency objec tives of a liability suit, even though it derives from an agreement be tween the industry and plaintiffs. There is no change in the product, information on hazards is widely available, payments are not made in l ump sums because of past behavior, and the financial claims made by th e states for recovery of medicaid costs are not justified because addi tional medicaid costs of smokers are more than offset by savings due t o their premature death. As a corrective tax, given the availability o f information on hazards and the lack of net external effects on third parties in excess of taxes, the market failure justification rests on suboptimal teenage smoking decisions that do not account fully for th e transaction costs of quitting. Recent evidence, however, suggests th at teenage participation may be relatively insensitive to price. Moreo ver, there are costs of introducing a highly regressive tax and of dis ruption that should be considered as a matter of public policy.