The welfare effect of advertising restrictions in the US cigarette industry

The welfare effect of advertising restrictions in the U.S. cigarette indust ry depends upon the impact of advertising on consumer and producer surplus, the transfer to consumers for being exposed to utility-reducing advertisin g, and smoking externalities. We estimate a demand equation and a supply re lation simultaneously and use the parameter estimates to generate predictio ns of the impact of advertising restrictions on social welfare. Our results show that advertising restrictions benefit producers by limiting competiti on and generating higher industry profits, and such restrictions lower soci al welfare if the external cost of cigarette smoking is sufficiently low.