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Published by Bill Hannegan

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Published by: Bill Hannegan on Dec 18, 2011
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14
REGULATION
SUMMER 2010
P R O P E R T Y
 Should policymakers worry about harm to bars,VFWs, and fraternal organizations? 
The Economic Losersfrom Smoking Bans
B
 Y 
M
ICHAEL
L. M
 ARLOW
California Polytechnic State University
mokingbansinpublicplacesarepromotedforavarietyofreasons,includingprotectingpub-lic health and discouraging smoking. Suchbans have become increasingly common intheUnitedStates.Accordingtotheban-advo-cacy group Americans for Nonsmokers’Rights, 29 states now prohibit smoking inrestaurants and 25 in bars. The group further claims that17,628municipalitiesarecoveredbyeitherlocalorstatebanson smoking in workplaces, restaurants, and/or bars.Business owners often raise concerns that they will beeconomically harmed by the bans. Ban proponents dismissthose concerns. The proponents typically cite two literaturereviews, one by M. Scollo et al. in 2003, and the other by MichaelEriksenandFrankChaloupkain2007,thatdescribethe academic literature as showing that the bans have nostatisticallysignificantnegativeeconomiceffectsonbarsandrestaurants, and may even have positive economic effects.Economists are naturally skeptical of assertions that a government intervention could yield benefits with no costs.Such intervention would be an example of the proverbial“free lunch,” and free lunches are few and far between.This article uses empirical evidence from Ohio’s recently adopted smoking ban to determine if such bans have nega-tive economic effects on bars and restaurants. The articleexamines ban noncompliance data from Ohio, under thehypothesisthatestablishmentsthatregularlyviolatethebando so because it is profitable to do so. The detail of the non-compliancedataallowsthisanalysistodeterminewhatsortsof establishments, if any, are harmed by the bans and whatsorts of establishments are not.Ohio’s comprehensive ban took effect in May of 2007. By 
S
Michael L. Marlow
is professor of economics at California Polytechnic StateUniversity in San Luis Obispo.The author received no grants or funding of any kind for preparing this paper.Hehas received past grants from Philip Morris Management Corp.for other researchinto the economic effects of smoking bans,and that research led to refereed pub-lications,all of which acknowledged that support.
the end of 2009, over 21,000 citations for violating the pro-hibitionwereissuedto4,422restaurantsandbars,andanoth-er11,000citationswereissuedto1,190veteransorganizations,fraternalorganizations,andprivateclubs.Thedataindicatethatindividualsowners,employees,customers,andsmok-ersassociatedwithbarsandorganizationsaremuchmorelikely to be harmed than their counterparts in restaurants. An important implication of this research is that previousstudiesunderestimatedharmbecausetheydidnotconsidertheimplications of establishments not complying with the bans.Thisarticlealsoraisestheimportantquestionofwhetherpol-icymakers pay less attention to the desires of some establish-mentsandtheirclientelenamely,barsandclubs,alongwiththeirpatronsthantoothersnamelyrestaurantsandtheircustomers.Thus,afulleraccountingofwhobearsthecostsof bansshouldbeweighedagainstanygainsbotheconomicandpublichealthinadebateoverthedesirabilityofsmokingbans.
PREVIOUS STUDIES
Previous studies of the economic effect of smoking banshave typically used a “community effects” methodology intheiranalysis.Thatis,theyusedaggregatedataintheiranaly-sis,lookingforchangesintotalrevenuesortaxreceiptsforallrestaurants, bars, organizations, and other establishmentscombined.“Communityeffects”studiesoftenconcludethatbans do not exert harm because nonsmokers outnumbersmokers,andthusbanscausemorenonsmokerstofrequentbusinesses and out-spend smokers who may lower their fre-quency and spending.Theproblemwiththismethodologyisthatitislikelook-ing at a community with 30 bars and restaurants and, afterobserving that total revenues have been $150 million foreach of the past five years, concluding that no changesoccurredoverthattime.Lostintheaggregationisthepossi-bility that some owners gained $2 million in revenues, somelost $2 million, and still others experienced no change. Anunchanged or rising community aggregate cannot uncoverwhetherrevenuesforsomeownersfell,orsomeownerswent
 
REGULATION
SUMMER 2010
15
     M      O     R      G     A     N     B     A     L     L     A     R     D
out of business, or if new businesses entered the communi-ty during the examination period.Morecarefulstudiesthatdisaggregateanalysistothelevelof individualbusinessesfindthatsmokingbansexertdifferentialeffects:someestablishmentsgain,somelose,andothersareunaf-fected.A1996studythatIconductedwithWilliamBoyesofbarandrestaurantownersfollowingthe1990smokingbaninSanLuisObispo,CAfoundthat17percentgained,25percentlost,and57percentwereunaffected.A2000nationwidestudythatIconductedwithJohnDunhamontheanticipatedeffectsofsmokingbanfoundthatsurveyedbarownerspredictedlossesfromsmokingbanstwiceasoftenasrestaurantowners.Forbars,82percentpredictedharm,2percentreportedgains,and14per-cent were unaffected. For restaurants, 39 percent predictedlosses,10percentreportedgains,and51percentwereunaffected.Owners who catered to many smokers predicted losses muchmore often than those who didnot.A2003studythatIalsocon-ducted with John Dunham of Wisconsin bar and restaurantownersconcludedthatbarown-erslostbusiness50percentmoreoftenthanrestaurantownersfol-lowingadoptionofalocalsmok-ing ban. Smoking ban studiesthat disaggregate to the level of businessintheUnitedKingdom,Scotland,andIndiaalsoyieldevi-denceofdifferentialeffects.Commonsensesuggeststhatowners who had not found itprofitable to voluntarily forbidsmoking prior to a ban will beharmedbyabanmoreoftenandmore likely to be cited for non-compliance. As for claims thatsmokingbansboostthevalueof bars and restaurants, a recentstudy by Robert Fleck and Andrew Hanssen suggests that,because bans are often adoptedmost readily in areas that areexperiencingabove-averagerisesin property values, studies of thosebansmistakenlyconcludethat they cause rising business values, when actually business valuesweremerelyrisinginstepwith overall real estate gains inthosecommunities.Bars probably suffer moreharm from bans than restau-rants because bars provide a more social atmosphere wherecustomersenjoyminglingwithoneanother.Barownersfinditmore expensive, and many cus-tomerswouldfinditunappealing,tosegregatesmokersfromnonsmokers, as would more normally occur in restaurantswheresuchminglingislessimportant.Mostbarsarealsotoosmalltoprofitablyoffersmoking/nonsmokingchoicesforbil-liards, darts, or dancing. Research showing that restaurantowners offer substantially more nonsmoking seating thanbars is consistent with this hypothesis. A new study by Dinska Van Gucht et al. of 110 Belgiansmokersassessedoverfourdaysisconsistentwithexpectationsthatlocationsthatfocusonalcoholandsocialgatheringaremuch more strongly associated with smoking than otherlocations. Over one-half of all 6,397 cigarettes (14.5 per per-sonperday,onaverage)smokedwereinjustfivetypesofloca-tions: living rooms, kitchens, outdoors, in cars, and in bars.Themostfrequentcircumstancesunderwhichthesecigaretteswere smoked were after eating, while watching TV or listen-
 
ing to the radio, on a work break, “on the go,” together withalcohol,inthecompanyofothers,whilehavingcoffee,andatwork. This study is consistent with expectations that socialsettingsinwhichalcoholispresentaremoreassociatedwithsmoking than restaurants where smokers apparently aremorecontenttosmokeuponleavingthepremisesthandur-ing meals. Moreover, studies also suggest that alcohol con-sumption influences both the magnitude and the emotion-al valence of cigarette cravings, thus again forging theconnection between alcohol establishments and smoking.
SOME MATTER MORE THAN OTHERS?
Ban proponents who cite “community effects” analyses arenot arguing that the bans are Pareto-optimal, as that wouldrequireeithernoharmtoanybarorrestaurantownerorade-quatecompensationtothosewhoareinjuredbytheban.Theprobablymeanthatharmtoindividualownersarematched,orsmallerthan,gainstootherowners.However,thisdistinctionis usually never discussed. Community effects studies do notdisaggregate to the level of individual owners, thus making itunclearwhogainsorlosesandwhethercharacteristicsofgain-ers and losers differinanysignificantmanner. A recent exception is a 2009 study by Hans Melbert andKarlLundofNorway’sban,inwhichaggregaterevenuegainsof restaurants were found to outweigh aggregate losses forbars.Theauthorsconclude,“Somesmallersub-sectorsmightexperience a decline, but the hospitality industry on thewholewillnotexperienceastatisticallysignificantdeclineinrevenue.”Apparently,theauthorsusedasocialwelfarefunc-tioninwhichallbarsandrestaurantsaretreatedequallyandthat, as long as the overall sum of revenues did not decline,the net economic damage is either zero or nonexistent. Of course,thisalsoignoresgainsorlossesimposedonworkers,customers, nonsmokers, and smokers.Thisdiscussionraisesquestionsofwhetherapolicythatcre-ates winners and losers is ethical — certainly an issue thatdeserves clarification when advocating bans on the groundsthat somehow the overall community is either unaffected orgainsfrombans.If,forexample,mostwinnersarerestaurantsandmostlosersarebars,doesthisfactmatter?Doesitmatterif most bars that lose are small, local “mom and pop” estab-lishmentsthatservelittleornofood,ratherthanlargecorpo-ratechainsthatofferfull-servicebarsalongwithlarge-scalefoodoperations?Unfortunately,the“communityeffects”method-ologydoesnotallowinspectionofwhoactuallygainsorloses.
NONCOMPLIANCE AS AN INDICATOR OF HARM
 A few compliance studies exist based on independent obser- vationsofsmallsubsetsofaffectedbusinesses.A2003studyby M.D.Weberetal.examining650Californiaestablishmentsperyearforfiveyearsfoundcomplianceratesrosefrom46percentto 76 percent for bars and from 92 percent to 99 percent forbars/restaurants over 1998–2002. A 2009 study by RolandMooreetal.of121stand-alonebarsinSanFranciscofound30 percent noncompliance rate during 2002–2003. A 2008study by Douglas Eadie et al. of Scotland’s ban found that,despitegovernmentclaimsof98percentcompliance,compli-anceratesfromasampleofeightbarsvariedsubstantially,withthe lowest levels observed in bars located in lower-incomeneighborhoods. These studies never entertain the hypothesisthat noncomplianceindicates bans harmsome businesses. An advantage of examining compliance data is that com-monly used measures of revenue or tax receipts may notalwaysreflectharm.Dataonprofitsatthelevelofindividualfirms have never been examined either, though such data would provide better measurement of harm than revenues.Moreover, bans affect owners, employees, and customers inwaysthatinvolverevenues,prices,services,hoursofoperation,wages, hours worked, menu items, and other factors.Measuring harm by any subset of these factors is clearly notpossible since research has shown that bans exert differenteffects on these many factors across different businesses. Arecentexamplemakesclearthatbanspushownerstore-arrangetheirbusinessattributes.NickHogan,aformerpublandlord, became the first person to be jailed in connectionwiththeUKsmokingbanafterrefusingtopayafineandcostsofroughly$11,000.Hoganargued:“Ninetypercentofpeoplewho come into my pub want to smoke. Even the nonsmok-ers think there should be a choice. These laws are ridicu-lous.” In contrast, Deborah Arnott, chief executive of theanti-smoking group
ash
, insisted it was a myth that thesmokingbansinanywaydamagedpubs.Arnottstated:“Many pubs have shifted their focus to serving food, so they havechangedtheirnature.”Butheranalysisisflawed;shiftingaway fromalcoholandtowardfoodreflectsharmreductionefforts,and likely would have been implemented prior to the ban if they were truly profit-enhancing. A focus on revenues or taxreceipts is unlikely to measure true levels of harm.Ownerswhodonotfinditprofitabletocomplywithabanwillpredictablybethosewiththemosttolosefromfullercom-pliance and, other than those who close their businesses, arethosemostdamagedbyaban.Fullercompliancecouldbepro-motedthroughhigherfines,morefrequentinspections,andpos-sible confiscation of liquor licenses or forced closures of busi-nesses. Continued noncompliance would thus appear to be a useful indicator of harm from bans and does not force us tochoose any one attribute — such as revenues or tax receipts —tomeasureharm.
OHIO’S SMOKING BAN
Ohio voters approved the state’s indoor smoking ban inNovemberof2006.TheOhioDepartmentofHealthestimatesthat280,000publicplacesandplacesofemploymentarecov-ered by the ban, which excludes only private residences, fami-ly-owned businesses with no non-family employees, certainareasofnursinghomes,outdoorpatios,andsomeretailtobac-costores.Businessownershavethreeresponsibilities:prohib-itsmokinginanypublicplaceorplaceofemployment,removeashtrays,andpostclearlylegibleno-smokingsignswiththetoll-free enforcement numberinconspicuousplaces.The law allows for both businesses and individuals to befined for violations, though recent court actions have calledintoquestionthelegalityoffiningownersforsmokingbycus-tomers.Businessesreceivewarninglettersforfirstviolations,
16
REGULATION
SUMMER 2010
P R O P E R T Y

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