Activity 3(e)

Activity 3e: Vaping

  1. Vaping products are likely to be classified as a demerit good because they are harmful to the consumer and may ultimately impose negative consumption externalities. As the case study reveals, the consumption of e-cigarettes may be associated with an increased risk of developing cancer. Future generations may therefore have to fund the extra healthcare costs that are associated with their use.
  2. Given that the consumption of e-cigarettes causes damage to the health of those who consume it, this will impose a cost on society who will indirectly fund their health treatments in the future. The producers and the consumers of the e-cigarettes do not typically consider these social costs when they decide to supply or consume the products. This results in an overallocation of resources to the their production and society’s wellbeing is therefore not maximised.
  3. A simple regulation designed to reduce consumption is limiting the purchase of the product to those who are over 18. This effectively shifts the demand curve to the left when compared to what might arise in a free market. The leftward shift of the demand curve would result in a movement back along the supply curve (ie a contraction) as the lack of demand causes surplus stock and leads to lower prices. In the long run, the reduced profitability of making vapes causes some manufacturers to leave the industry, causing the supply curve to shift left over time.
  4. Education campaigns are designed to reduce ignorance (reduce the extent of asymmetric information) associated with the consumption of vapes. Therefore they are designed to alter tastes and preferences such that the demand curve shifts to the left.
  5. Asymmetric information occurs when one part in a transaction knows more than the other party. Given that many users of vapes are young people, they may not have full knowledge of what is in the vapes and the damage that is associated with their consumption. In contrast, the manufacturer will know what is in the product they sell and will often seek to hide such information from the ultimate consumer. This means that the consumer is not making a fully informed rational decision. This leads to an overallocation of resources to their production (and consumption). In the long term it could also lead to a reduction in both technical and inter-temporal efficiency as consumers develop preventable health conditions, causing them to work less efficiently. Excess consumption of vapes may also reduce enjoyment of life in the future and result in unnecessary expenses.