Coase and Smoking: Who’s the Victim Here?

Thom Lambert —  19 January 2006

Today’s New York Times reports on a new cigarette bar in Chicago, where the city council has just imposed a sweeping smoking ban. (I recently criticized the ban at Ideoblog.) The proprietors of the Marshall McGearty Tobacco Lounge insist that the lounge is permitted because of a loophole allowing smoking in retail tobacco shops. Not surprisingly, Chicago’s anti-smoking zealots are seeking to shut down the business, which they say violates the intent of the anti-smoking ordinance.

The situation here exemplifies Ronald Coase’s seminal insight regarding the difficulty of distinguishing the victims from the victimizers in a property rights dispute. With respect to smoking in public places, non-smokers (like me!) would seem to be victimized by smokers’ insistence on the right to light up. But aren’t smokers, who derive substantial pleasure from smoking, the victims of non-smokers’ insistence on smoke-free air? Sure they are. The owners and customers of the Marshall McGearty Tobacco Lounge will be genuinely harmed if non-smokers are allowed to shut them down.

In light of this “reciprocal harm,â€? there will always be winners (whose happiness is enhanced) and losers (whose happiness is diminished) when a smoking policy is established. The world would be best off, of course, if smoking policies were set to favor the group whose total happiness will be most increased if its favored policy is implemented. So, if smoking customers value the right to smoke in a particular place more than non-smoking customers value the right to be free from such smoke, smoking should be allowed in that place. Conversely, if non-smoking patrons value an establishment’s clean air more than smoking patrons value the right to light up, smoking should be banned.

In an unregulated market, the proprietor of an establishment can decide for himself whether his smoking customers or his non-smoking customers value their preferred smoking policy more. In an attempt to maximize his profits, he’ll set his establishment’s smoking policy to accommodate the patrons who most value their preferred policy (and thus are most willing to pay a premium to be in the proprietor’s space). This will result in a variety of smoking policies at different establishments. Indeed, such sorting of establishments according to customer preferences was occurring all over Chicago prior to the enactment of the city-wide ban. Everyone in the city could find a place that suited his or her tastes, and wealth was therefore maximized.

Things are different now. The city’s new ban victimizes smokers and effectively reduces wealth by preventing transactions that could create happiness (e.g., a restaurant patron pays a slight premium to the owner for the right to smoke in his space; both parties are better off because of the deal).

I can’t overstate how much I loathe cigarette smoke. (I actually keep a bottle of Febreze in my car so I can de-stench my clothes after I’ve been in a smoky place. Try it — it works!) I must recognize, though, that my insistence on a smoke-free environment hurts people who like to smoke. In the Chicago of old, I could peacefully co-exist with my smoking brothers and sisters. Now I’m a victimizer.

Thom Lambert


I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

13 responses to Coase and Smoking: Who’s the Victim Here?


    A premise of the whole push for smoking bans is that ETS is killing large numbers of nonsmokers. Any group seeking to prevent or repeal a smoking ban in their locality should always and constantly dispute this premise. Libertarians in St. Louis foiled an attempted smoking ban by suggesting an estimate of ETS danger well stated by Elisabeth Whelan:
    Property rights and economic arguments alone don’t seem to be enough.


    Well, here in Chicago, there are many ways to enjoy food and a smoke. Many bars serve great food! Also, any restaurant with a bar area can serve food within 15 feet of the bar as well. Also, there are many suburbs that allow smoking. I’ve made a website to help us all record our favorite places to smoke and eat! Check it out! And viva la free market!


    In order for the law to work by forcing everyone to cooperate in a prisoner’s dilemma situation, it actually has to force *everyone* to cooperate. It can’t throw in a couple of exceptions. From what you’re saying the law bans smoking in coffeeshops, but doesn’t ban smoking in certain establishments that are de-facto coffeeshops (but not recognized by the law as such).

    Forcing everyone to cooperate, except a couple, who get permission to defect all that they want, won’t work.


    I’d like also thank you all for the chance to read this very intelligent discussion. I do appreciate you all taking the time to post.

    As I can’t really add much to the intellectual discussion, I thought I’d give a view from Wicker Park:

    I live 4 doors down from Marshall McGearty – I just stopped in for the first time. (I’m a 32yr old smoker who’s cut it down to less than a smoke per day of late – ‘cept when I drink…) It’s an eerie feeling walking in there – behind the counter and walking around are 4 or 5 young people, dressed to the nines in neighborhood-issued hipster garb and as you come across each one, you get their multinational-tobacco-conglomerate-endorsed greeting, “hi – welcome to Marshall McGearty, are you a smoker?” Not only do I get the feeling these folks are as new to Chicago as the store in which they work, but they act as though if you could unzip their disguises and remove them, you’d find a 65yr old tobacco executive underneath.

    Regardless, and more to my point, these broad strokes that anti-smoking zealots work with have now cut the business of two coffeeshops down the street by 40%, if not 50%. Many of their customers are going to the new and beautifully furnished (how can a start-up neighborhood shop afford it??) tobacco lounge because they can get their coffee and have their cigarette there, whereas it is now illegal the aforementioned coffee shops.

    Marshall McGearty has liqour, coffee, smoking parapharnelia, and tobacco for sale. From what I have read, they’ll need to get at least 65% of revenues from tobacco in order to stay open after the second phase of the Chicago Smoking Ordinance passes in 2008. I can see how they’ll do it – already they are giving away free coffee and espresso drinks, which got me to thinking – what the hell does RJ Reynolds care if they turn a profit here? They are here to find the smokers, create exclusivity, and breed more smokers. Nothing new here, I know, but meanwhile familiar neighborhood faces from behind the counters of the other coffeeshops down the street are suffering – big time.

    Another “unintended” consequence from the anti-public smoking contingent I’m sure, but it the meantime two neighborhood spots with neighborhood owners are being severely affected – all at the hands of big wigs from North Carolina with loop-holes, lobbyists and deep pockets. Now that it’s here, and it has its licenses – it’s here to stay – the city can’t (and likely won’t) go dollar for dollar with RJ Reynolds in the legal arena, and as Marshall McGearty doesn’t really care if it turns a profit, it could meet a “100% revenue from tobacco” requirement, if so imposed.

    So, I’d like to add another fews “victims” to the list: my neighborhood, its neighborhood coffeeshops, and its neighborhood coffeeshop baristas, who are now out looking for seconds jobs.

    Passing Through 21 January 2006 at 9:38 am

    An excellent conversation here.

    As mentioned in T.L.’s original post, smokers find utility in smoking. When considering whether to ban smoking in gathering places, how does one value the magnitude of this utility and decide whether this benefit outweighs attendant costs? True, this is a problem common to most cost-benefit analyses. Given this problem, however, I don’t see that citations to the New England Journal of Medicine advance the debate very much. In other words, even if the author of the cited article had concluded that smoking increases overall healthcare costs, how would a policy analyst determine if the utility of smoking nonetheless outweighs these increased costs?

    Maybe it’s better to perform a rough cost-benefit analysis than to perform no such analysis at all. On the other hand, maybe the analyst should sometimes admit that a significant input cannot be quantified (or monetized) and instead resort to policy-making based on other, non-economic factors.

    Having said that, I must admit frustration with the public (i.e., non-academic) discourse that surrounds smoking. Specifically, I wish more people would recognize that policy considerations relating to smoking have much in common with policy considerations relating to driving, fast food, construction, etc. (as discussed in this blog).

    Consider driving. To oversimplify, drivers may derive monetary benefits from their ability to commute to work, and they may derive non-monetary benefits from solitude, free reign over the radio, and so on. What are the risks? Among others, there’s the risk that one driver will crash into another, taking that other driver’s life. The question of how we value that risk requires that we value a life. Economists have certainly attempted valuation of a statistical life, but others have suggested that these valuations are simplistic, and even “heartless”. (e.g., “Yes, Johnny earned $100 dollar per month and his family will miss his income. But Johnny also served as a role model for the children he mentored, and he was also a fun person to be around. Given all this, Mr. Analyst, how can you say that a value of Johnny’s life was $X?)

    My point is that (a) policy makers should attempt to value monetary and non-monetary when making policy choices and (b) the public, at least in the lost-life debtate, has historically objected to the perceived under-valuation of non-monetary costs. (I wish I had a cite at my fingertips, but I don’t.) If the public accepts the notion of non-monetary costs in the lost-life context, why don’t the non-monetary benefits of smoking get more play in the public discourse surrounding smoking?

    Finally, a nod to K.A.’s absurd face-punching example. I’ve historically found it difficult to convince people that policy-making relating to smoking and driving have much in common. My gut told me that face-punching has nothing to do with smoking (or driving or fast food). On reflection, however, I think face-punching is an excellent analogy. (Maybe the utility of punching otheres outweighs the externalized costs. Even if we tried to value this utility, the valuation would have dubious reliability. (The same goes for valuing the costs of living in fear in such a world.) And, thus we make policy based on other, non-economic factors.)

    Thank you all for such a high-minded discussion.


    Imagine that in some stores customers liked punching other customers in the face at random.

    We could just ban punching people in the face.

    But we could also let stores demand that all their customers consent to being punched in the face as a condition of being in the store. The free market, then, could take care of the problem. If a lot of people don’t want to be punched in the face, stores that allow it will lose customers.

    Oddly, we usually take the first approach.

    Besides, allowing smoking is a standard prisoner’s dilemma situation. Assume that smokers prefer smoking bars, but are willing to go to nonsmoking bars if that’s all there is.

    If every store bans smoking, then they get all the customers and no smoke. This is the all-cooperation scenario.

    If every store allows smoking, then they get the same customers with smoke, which makes them worse off. This is the all-defection scenario.

    But when every store bans smoking, each individual store has an incentive to defect and allow smoking to gain a competitive advantage. However, every store realizes this, so they all allow smoking, and we end up with the all-defection scenario. They’re all worse off than if none of them allowed smoking.

    The free market, in this situation, will fail because it leads to the all-D situation due to each store choosing to defect. However, a government-imposed solution might enforce the all-C situation, and therefore be preferable to the free market.


    thank you for your response – i’ve been looking (begging) for a good rebuttal to that argument for quite some time, as i certainly don’t like that “slippery slope” you mentioned.

    i do still disagree about whether or not smoking bans decrease smoking (and have several examples), but this is for another time.


    Excellent post, and response! What we also see here is the way in which government policy turns into moral crusading. If the government’s purpose in banning smoking in public places is to protect the rights of non-smokers, fine. I don’t agree, but I can accept that. But in a place whose sole purpose is smoking, how can this argument still hold? It doesn’t, and that point is made clear in the comments of the anti-smoking activist: “It’s trying to get an 18-to-25 demographic here, to make smoking seem desirable, attractive, like a secret club,” said Bronson Frick, associate director for Americans for Nonsmokers’ Rights, a group based in Berkeley, Calif. [end quote] Frick is upset not about the rights of non-smokers, which of course aren’t being hurt in a smoking lounge, but that he doesn’t like smoking and it’s existence is a moral affront to him. This is one of the unspoken dangers of government regulation: its use by moral crusaders to impose their will and values on the rest of society.


    Thanks for the comments. Here are a couple of thoughts.

    It’s difficult to justify a smoking ban based on the externalities associated with higher health care costs. Most importantly, such externalities likely don’t exist. According to “The Health Care Costs of Smoking,” 337 New Eng. J. Med. 1052 (1997), smoking probably has the effect of reducing overall health care costs, for smokers die earlier than non-smokers. The article abstract states:

    “Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.”

    In addition, you’re on a pretty slippery slope here. If health care costs justify government imposition of a smoking ban in privately owned places, wouldn’t they similarly justify regulation of the menu at McDonald’s? Is the government going to make us be healthy so that we don’t impose costs on our fellow citizens?

    One can argue, of course, that there are other externalities associated with smoking in “public” places (i.e., private places to which members of the public are invited), but those externality-based arguments also seem to fall apart. See my recent Ideoblog post (linked in the main post here) for more info.

    I might also take issue with your assertion that “reducing the areas where one may smoke almost certainly has the effect of reducing the numbers of smokers in society, as they will not see smoking as being as advantageous or enjoyable if they cannot smoke in social establishments.” I’m not sure this is correct. A huge percentage of smokers (most, I would guess) pick up the habit at a young age, and they frequently do so because smoking is “cool.” Smoking is cool, of course, because it’s rebellious. The harder the anti-smoking zealots work to force people to stop smoking, the more rebellious — and thus the cooler — smoking becomes. As an empirical matter, I don’t know if smoking band increase or reduce the incidence of smoking by young folks, but it’s certainly not clear that their effect is to reduce smoking overall.


    on nearly every level, i fully agree. i am also a non-smoker who hates smoke passionately, but regulating people’s recreational choices in this manner is simply not the function of government. reducing the areas where one may smoke almost certainly has the effect of reducing the numbers of smokers in society, as they will not see smoking as being as advantageous or enjoyable if they cannot smoke in social establishments. i see these laws as a clear attempt to slowly squeeze smokers out of every area other than their homes, and as another baby step toward banning smoking altogether. as i said, i like the idea of fewer smokers around me, but not because of government mandate.

    however, there is one place where i question this logic. where do health care costs factor in to the equation? if a smoker’s choice of whether or not to damage her body TRULY only affected her, then it should be entirely her choice (and not government’s). However, in our current state of affairs, once this person comes down with lung disease, there is a good chance her health care costs may be spread to the rest of society through a health care entitlement program. this negative externality is not accounted for in the decision of whether or not to smoke, nor in the decision of whether or not to open one’s establishment to smokers.

    so this makes my feelings on the issue split: on the one hand, i want the free market to determine where one can and cannot smoke (but not reducing the number of smokers), but i don’t want to pick up the tab for the substantially increased health care costs that flow from it. any thoughts? please set me straight on the issue.

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