This study estimated that the 'total domestic output arising from the activities of the tobacco industry was valued at $8 billion', half of which was generated directly by the industry, and the remainder of which was generated by 'flow on effects generated elsewhere in the domestic economy'.
The report defines the tobacco industry in the broadest possible terms: 'to encompass the growing, manufacturing and distribution activities associated with bringing a final product to consumers. This includes the research and extension services which form part of the growing process, the production, packaging, distribution and marketing activities carried out by the major manufacturers, through to wholesaling and retailing activities performed by a large number of dispersed businesses.'(10)
This broad brush approach generates figures which exceed those recorded by the Australian Bureau of Statistics for tobacco manufacturing by more than twentyfold for employment, and more than fivefold for wages.(16) (Of course, studies of this kind could legitimately include a proportion of employment in the medical and health professions as an economic benefit associated with smoking, but this does not appear to have been considered(11)).
This report has been produced in two versions; the first was submitted to the Industry Commission review of the Tobacco Growing and Manufacturing Industries in March 1994, and the second, which substantially revised downwards its estimated benefits values, was presented to the Industry Commission during subsequent draft report hearings.(3)
Initially, the ACIL report estimated that smoking, and the associated activities which supply tobacco products to smokers, provided net benefits to Australians and Australia of around $12.5 billion in 1992-1993. Of this sum, $9.1 billion was attributable to what the study defines as smokers' consumer surplus, or the net benefits to smokers over and above the costs to them of smoking. The remaining $3.4 billion constituted the tobacco industry's value added income generated or GDP contribution. The report asserts that smokers pay taxes and tariff imposts of $2.6 billion annually. Offsetting this contribution by the estimated $0.4 billion they absorb by more intensive use of subsidised health care, smokers contribute an excess of $2.2 billion per year, mainly to consolidated revenue. In their revised report, ACIL adjusted the price elasticity of demand for smoking, resulting in a lower estimate of consumer surplus of $5.7 billion per year. According to the Industry Commission's report, ACIL also deleted the $3.4 billion value added estimate, as value added does not represent net benefits to the tobacco industries. The actual net benefit (producers' surplus) remains unknown, although ACIL suggested it would not differ significantly from the value added estimate.(3) [Note: In a subsequent letter to the Australian Financial Review, ACIL denied that they had deleted the value added benefit, claiming that this was an error in reporting by the IC(17)].
The calculation by ACIL of perceived consumer surplus is a key component of the study, in that the net benefit which they originally calculated accounted for almost 75% of the total (net) contribution of tobacco to the economy. According to ACIL, the value of smoking to smokers totalled $17.7 billion in 1992-1993, comprising the purchase and related costs of $8.6 billion, plus a consumer surplus of $9.1 billion. The initial report claims this to be a net benefit to smokers of $9.1 billion.
Consumer surplus can be defined as the difference between what consumers pay for tobacco products, and what they would be prepared to pay; which, it has been observed, represents a measure of the addictiveness of tobacco.(18) The fact that it is high for tobacco products simply demonstrates that demand for tobacco is relatively inelastic (see also Chapter 7, Section 6). Another way of defining consumer surplus in the case of tobacco would be to call it the amount of money smokers would be prepared to pay in order to avoid the discomfort of drug withdrawal.
Responding to ACIL's consumer surplus estimation, the Industry Commission observed that(3):
To put ACIL's original $9.1 billion estimate of consumer surplus into perspective, the Commission notes that total private final consumption expenditure on food for 1992-1993 was $36.6 billion -- and since less than one quarter of the population are smokers, it implies that smokers were willing to pay an additional amount (over and above the $5.4 billion spent on cigarettes and tobacco in that year) equivalent to their total expenditure on food in order to maintain the same level of cigarette consumption.
Despite ACIL's downward revision of the estimate of consumer surplus, the Commission is inclined to question the validity of equating willingness to pay with a net benefit to consumers of tobacco products. Since each consumer has a finite budget, the ability to pay would require a reduction in consumption of other goods and a corresponding reduction in whatever benefit currently accrues from the consumption of those other goods.
It has also been observed that the notion that consumers would be prepared to pay more than they do would apply to almost any other product available on the Australian market.(17) The concept of 'consumer surplus' is out of place in this kind of economic study; its use is more common in research where the goods or services under examination are not freely traded in the market place (for example the environment).(19)
ACIL's approach to health issues is also open to question. They reach their own estimates of health care costs for smokers, based on Collins' and Lapsley's first report(2), but express the view that in the Collins and Lapsley report 'smoking as a potential cause of reduced lifespan was substantially overstated' and so halve the original estimates. ACIL arrives at a figure of $0.4 billion for health care costs in 1992-1993, compared to the $1.027 billion in net costs estimated by Collins and Lapsley for 1992.(4) The ACIL report also disputes passive smoking as a health issue, claiming instead that the predominance of common courtesy in human interactions has ensured for many years that people who do not wish to be exposed to environmental tobacco smoke have not been. This ignores extensive medical evidence, the subsequent wide-spread introduction of smokefree policies, and legal action which has arisen due to exposure to ETS(see also Chapters 4 and 6).
A final but nonetheless extremely important point underlying this study is the assumption that smokers overwhelmingly smoke out of rational choice. ACIL claims that 'in Australia, surveys have established that virtually everyone is well informed about possible health risks from smoking' and that 'the evidence is clear that new smokers, young or old commence smoking with their 'eyes open'. The large numbers of people who cease smoking each year illustrate that people can make decisions to stop smoking and act upon those decisions'.(11) By assuming that smokers therefore intentionally bear the costs of their smoking behaviour, ACIL categorises the costs they incur as 'private' rather than 'social' costs. However to the extent that smokers are not aware or are irrationally addicted, at least some proportion of these costs will be social costs.(3) ACIL also refers to American research which suggests that smokers tend to overestimate major smoking health risks, to further their argument that smokers choose to smoke regardless of perceived personal risk. This research(20) has been discredited as fundamentally faulty and misleading.(21,22)
Unfortunately the facts remain that: most people who take up smoking are teenagers with little concern for long term health consequences; the behaviour is concentrated in the less-educated segments of society; smoking is unsafe at any level and highly addictive; and that most smokers would like to give up but do not always find it easy to do so. And although awareness among smokers about the health risks associated with smoking has improved over the last decade, in 1991 one in seven smokers still believed that smoking did not cause disease.(23) See also Chapter 1 Section 7, Chapter 3 Section 20, and Chapters 10, 11 and 12.