Resource Economics

Assignment #01

Submitted by:

Hafsa Ghazali (405814)

BS Economics Section A 2k22

Submitted to:
Dr. Irfan

National University of Sciences and Technology (NUST)

3rd semester, 2023

 Case Study: Smoking in a Shared Workplace

Explaining the issue of smoking in a shared workplace using the Coase Theorem involves considering
how well-defined property rights and transaction costs can influence the resolution of this matter. It
suggests that under certain conditions, private parties can negotiate and arrive at an efficient outcome
without government intervention.

Scenario:
Imagine a shared workspace where some employees smoke, causing discomfort and health concerns for
non-smoking employees. The challenge is to find an efficient solution to this problem without
government intervention.

Application of the Coase Theorem:

1.Clearly Defined Property Rights: The first step in applying the Coase Theorem is to establish clear
property rights. In this case, property rights could involve the right to smoke in designated areas or the
right to a smoke-free workspace.

2. Identify the Externalities: Identify the externalities involved. Smoking creates negative externalities
for non-smokers in terms of health risks and discomfort.

3.Negotiation between Parties: Encourage negotiation between the parties involved (smokers and non-
smokers) to reach an agreement that minimizes the negative externalities. This could involve discussions
on designated smoking areas, smoking schedules, or the adoption of air purification systems to reduce
the impact of secondhand smoke.

4. Bargaining and Compensation: Parties may need to negotiate compensation or agree on a mutually
beneficial arrangement. For example, smokers might agree to take their smoking breaks in designated
areas far from non-smokers, or they might agree to use smokeless alternatives, such as e-cigarettes. In
return, non-smokers may agree to certain concessions or accommodations.

5. Efficient Outcome: The Coase Theorem suggests that, if transaction costs are low and property rights
are well-defined, the parties can arrive at an efficient outcome. This means that they will find a solution
that minimizes the negative externalities of smoking while maximizing the overall well-being and
productivity of the shared workspace.

Externalities:
1. Negative Health Externalities: Smoking can have negative health externalities on non-smoking
employees who are exposed to secondhand smoke. These individuals may experience health issues such
as respiratory problems, increased risk of heart disease, and irritation due to exposure to tobacco
smoke. They did not choose to be exposed to these health risks, making it a negative externality.

2. Productivity Externalities: Smoking breaks, when taken frequently by some employees, can disrupt
the workflow and productivity of others in the shared workplace. Non-smoking employees may be
indirectly affected by the reduced productivity of their smoking colleagues, which is an economic
externality.

In the case study of smoking in a shared workplace, there are both benefits and costs associated with
various actions and policies related to smoking. These benefits and costs can be evaluated as follows:

Benefits:
1. Improved Indoor Air Quality: One of the primary benefits of implementing policies and designated
smoking areas is the improved indoor air quality within the shared workplace. This benefit directly
affects the health and comfort of non-smoking employees, reducing their exposure to secondhand
smoke.

2.Increased Productivity: Regulating smoking breaks and reducing disruptions caused by smoking can
lead to increased overall productivity in the workplace. Non-smoking employees are less likely to be
interrupted, and smoking employees have designated areas to use, minimizing the impact on their work
and that of their colleagues.

3. Health Benefits: Providing support for smoking cessation programs and counseling services can
benefit employees who wish to quit smoking. This can lead to improved health outcomes for those
individuals, including reduced risk of smoking-related diseases.

4. Positive Employee Relations: By addressing the concerns of both smokers and non-smokers, the
company can foster positive employee relations and maintain a harmonious work environment. This can
contribute to higher employee morale and job satisfaction.

Costs:
1. Implementation Costs: There may be costs associated with implementing and enforcing smoking
policies, such as developing clear guidelines, providing designated smoking areas, and monitoring
compliance.

2. Support for Smoking Cessation: Providing resources and support for smoking cessation programs and
counseling services can incur expenses for the company.

3. Potential Resistance: There might be initial resistance or pushback from employees, particularly
smokers, when new smoking policies are introduced. This resistance could lead to the need for
additional communication, training, or conflict resolution efforts.

4. Monitoring and Enforcement: Ensuring that smoking policies are followed may require ongoing
monitoring and enforcement efforts, which can also involve associated costs.

Conclusion:
In summary, the benefits of implementing policies and measures to address smoking in the shared
workplace include improved indoor air quality, increased productivity, potential health benefits for
employees, and positive employee relations. However, these benefits must be weighed against the costs
of implementation, support for smoking cessation, potential resistance, and ongoing monitoring and
enforcement efforts. Ultimately, the goal is to create a workplace environment that balances the needs
and preferences of both smokers and non-smokers while maximizing overall benefits and minimizing
costs.

1-What are the key characteristics that define smoking in a shared workspace as a private good?

Smoking in a shared workspace would typically be considered a private good. Private goods are those
that are both excludable and rivalrous, meaning one person's use of the good prevents or limits another
person's use, and access to the good can be controlled or restricted. In a shared workspace, smoking can
be restricted or controlled by policies, rules, or agreements among the users of the space, making it
excludable. Additionally, if one person is smoking in the workspace, it may negatively impact the air
quality and comfort of others, making it rivalrous as well.

2-How does smoking contribute to market failure in a shared workspace?

Smoking in a shared workspace can contribute to market failure in several ways, primarily due to the
negative externalities associated with smoking. Smoking in a shared workspace can lead to health
problems for both smokers and non-smokers. Secondhand smoke exposure poses health risks to non-
smokers, which can result in increased healthcare costs and decreased productivity. When these health
costs are not borne by the smokers themselves but are instead externalized onto others or society as a
whole, it represents a market failure. Smoking breaks can reduce overall productivity in a shared
workspace. These productivity losses can have economic consequences for the business and can
contribute to inefficiency in resource allocation. Smoking indoors can result in additional maintenance
and cleaning costs. The workspace may need more frequent cleaning to remove smoke residue and
odors, and there may be added wear and tear on ventilation systems. These costs are not typically
accounted for in the price of renting or using shared workspace, leading to inefficient resource
allocation. In many regions, there are regulations and laws related to smoking in indoor public spaces.
Failing to comply with these regulations can result in fines and legal costs. These costs can be
externalized to the extent that they are not borne by the individuals responsible for violating the rules.
To mitigate these market failures, shared workspace providers may implement policies such as
designating smoking areas, enforcing no-smoking policies indoors, or providing smoking cessation
resources to help users quit smoking.

3-What are the economic and health consequences of smoking?

Healthcare Costs: Smoking leads to a range of serious health problems, including lung cancer, heart
disease, and respiratory illnesses. As a result, smokers tend to have higher healthcare costs than non-
smokers. These costs are often covered by health insurance, and when smokers do not fully internalize
these expenses, it can lead to higher insurance premiums for everyone. This is an example of the private
goods problem because individual smokers may not consider the overall impact of their choices on
healthcare costs.

Lost Productivity: Smoking breaks and health-related absences from work can result in lost productivity
for both smokers and employers. While this directly affects the economic well-being of the individuals
and businesses involved, it may not fully account for the broader economic impact on society as a
whole, which is another manifestation of the private goods problem.

Increased Mortality and Morbidity: Smoking is a leading cause of preventable deaths worldwide. It is
associated with a higher risk of various diseases and conditions, leading to premature mortality and
increased morbidity. These health consequences primarily affect individual smokers, but they also have
broader societal implications.

Secondhand Smoke: Non-smokers who are exposed to secondhand smoke can also experience adverse
health effects, such as respiratory problems and an increased risk of heart disease. This is an example of
an external cost imposed on non-smokers due to the private choices of smokers.

Public Health Costs: The burden of treating smoking-related diseases and providing public health
campaigns to discourage smoking is often shouldered by society as a whole, including taxpayers. This is
another instance where the private goods problem comes into play, as individual smokers may not fully
bear the costs of these public health efforts.

4-How has government policy, such as free smoking zones, attempted to address the market failure
associated with clean air?

Government policies, including the establishment of designated smoking zones, are one of the ways
authorities have attempted to address the market failure associated with clean air and the negative
externalities of smoking. These policies aim to strike a balance between accommodating the preferences
of smokers and protecting the health and well-being of non-smokers and the environment. Here's how
designated smoking zones help mitigate market failure related to clean air:

1. Internalizing Externalities: The negative externalities of smoking, such as secondhand smoke exposure
and environmental pollution, create costs that are not borne by individual smokers but affect others. By
designating specific areas for smoking, governments aim to contain these externalities within defined
spaces, allowing non-smokers to enjoy cleaner air in most areas while smokers can exercise their choice
to smoke in designated zones.

2. Protecting Non-Smokers: Designated smoking zones help protect non-smokers from the harmful
effects of secondhand smoke. When non-smokers are exposed to secondhand smoke, it can have
adverse health effects and increase healthcare costs, which is a form of market failure. By creating
smoking zones, governments reduce the involuntary exposure of non-smokers to tobacco smoke.

3. Promoting Public Health: By restricting smoking to designated areas, governments can promote public
health by discouraging smoking in places where people congregate, such as public buildings, parks, and
transportation hubs. This can contribute to a reduction in smoking rates over time, further improving
public health outcomes and reducing healthcare costs.

5. Clarity and Enforcement: Clear regulations and designated zones provide clarity for both smokers and
non-smokers. Smokers know where they can smoke without violating rules, and non-smokers can expect
smoke-free areas. Enforcement of these policies ensures that they are respected, further reducing the
negative externalities associated with smoking.

6. Balancing Individual Rights: Designated smoking zones strike a balance between the individual right to
smoke and the collective right to clean air and public health. They acknowledge smokers' preferences
while minimizing the negative effects on non-smokers and society as a whole.

Overall, government policies like designated smoking zones are part of a broader strategy to mitigate
the market failure linked to clean air by reducing the negative impacts of smoking on public health, the
environment, and society.