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February, 2009Taxation and Regulation of Smoking, Drinking and Gambling in theEuropean UnionSijbren Cnossen, editorDavid ForrestStephen Smith

CPB Netherlands Bureau for Economic Policy AnalysisVan Stolkweg 14P.O. Box 805102508 GM The Hague, the NetherlandsTelephone 31 70 338 33 80Telefax 31 70 338 33 50Internetwww.cpb.nlISBN 978-90-5833-384-12

ABSTRACT IN ENGLISHAbstract in EnglishSmoking is the single largest cause of avoidable death in the European Union accounting forover half a million deaths each year. One in ten of all 11-year olds have been drunk twice ormore times, possibly causing lasting physical and mental harm. Electronic gaming machines arethe crack cocaine of gambling. Consumer sovereignty, on the other hand, indicates that peopleshould be allowed to smoke as long as they do not harm others. There is sound medicalevidence, furthermore, that a drink each day keeps the doctor away, while recreational gamblingcan be an enjoyable form of entertainment for many people. These and other salient facts aboutthe harmful and positive effects of smoking, drinking and gambling provide the background fora dispassionate economic analysis of the taxation and regulation of these activities. The mainmessage the studies convey is that it would be unrealistic to rely solely on duty levels anddifferentiation to curb abusive use. Duty levels do have a clear impact in restrainingconsumption by children and young adults – an important priority for policy. Butcomplementary policies – including direct regulation and provision of information – also have ameaningful role to play in each of the markets for tobacco, alcohol and gambling.Key words: taxation, tobacco, alcohol, gambling, regulation, externalities, European UnionJEL codes: H 2, H 8, H23, I 18, L 83Abstract in DutchRoken is de belangrijkste oorzaak van vermijdbare sterfte in de Europese Unie, waaraan elk jaareen half miljoen doden kunnen worden toegeschreven. Een op de tien 11-jarige kinderen is altwee keer of vaker dronken geweest, mogelijkerwijs met blijvende lichamelijke en mentaleschade. Elektronische gokmachines vormen de heroïne van de kansspelwereld. Daar staattegenover dat het beginsel van de consumentensoevereiniteit aangeeft dat mensen zoveel mogenroken als zij willen als zij anderen geen schade toebrengen. Gezond medisch onderzoek toontook aan dat een dagelijks drankje goed is voor hart en bloedvaten. En gematigd gokken kan eenonderhoudende vorm van vrijetijdsbesteding zijn. Deze en andere saillante feiten over deschadelijke en positieve effecten van roken, drinken en gokken vormen de achtergrond voor eennuchtere economische analyse van de belasting en regulering van deze activiteiten. Dehoofdboodschap van de studies is dat het niet realistisch zou zijn om uitsluitend op de hoogte enstructuur van accijnsheffingen te vertrouwen om misbruik te beteugelen. Wel blijken hogeaccijnzen effectief te zijn in het terugdringen van de consumptie van kinderen en jongeren – eenbelangrijke beleidsprioriteit. Maar complementair beleid – met inbegrip van directe reguleringen informatieverschaffing – vervult een rol van betekenis in elk van de markten voor tabak,alcohol en kansspelen.Steekwoorden: belastingen, tabak, alcohol, kansspelen, externe effecten, Europese Unie3

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: ABSTRACT IN DUTCH4

ContentsList of figures7List of tables8List of boxes9Preface11Summary13Nederlandse samenvatting (Dutch summary)151Restraining the golden weed: taxation and regulation of tobacco171.1Introduction171.2The external costs of smoking: definition and measurement201.2.1The scale of smoking externalities211.2.2Effects on family members241.2.3Healthcare finance and external costs241.2.4Effects on wages and productivity251.3Smoking externalities, taxation and regulation261.4Tobacco tax policy281.4.1Revenue-raising efficiency281.4.2The relative taxation of different products301.5Distributional aspects of tobacco taxation331.6International interactions and domestic tax policy351.7Conclusions37Discussion402Do drinkers pay their way in the European Union?432.1Introduction432.2Alcohol use and effects452.2.1Drinking patterns452.2.2Consequences of harmful alcohol use48Social and external costs of harmful alcohol use492.3.1492.3Social costs in various Member States5

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION:2.42.3.2Problems with COI Studies512.3.3External costs in various Member States51Excise duty structures542.4.1Duty structures in Member States542.4.2Setting the level of the alcohol excise duty562.4.3Alcohol excise duty coordination582.5Alcohol regulation602.6Implications for the EU’s alcohol tax policy63Discussion643Gambling policy in the European Union: too many losers?693.1Introduction693.2Similarities and differences in the analysis of gambling and other subjects of excisetaxation713.3Levels of taxation in the EU733.4Efficiency of gambling taxes773.4.1Consumer surplus from gambling products773.4.2Social costs of gambling813.5Equity considerations853.6Limitations on capacity to tax gambling893.6.1The rise of the resort casino893.6.2The rise of remote gambling90Discussion93References95Notes on contributors6111

List of figuresFigure 3.1Gross gaming revenues as a percentage of GDP, 200373Figure 3.2Loss of consumer surplus from a tax on UK Lotto78Figure 3.3Consumer surplus of compulsive or recreational players807

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION:List of tablesTable 1.1Taxation of cigarettes in EU Member States, July 200818Table 1.2Expected external costs per pack cigarettes23Table 1.3Income and expenditure shares of tobacco spending, UK, 200434Table 1.4The relationship between demand elasticity and the revenue-maximizing taxrate: Crawford-and Tanner 'Critical Elasticities' at different tax rates37Table 2.1Alcohol drinking prevalence in the European Union in 200346Table 2.2Social costs of alcohol use in Europe in 2003 (average estimates)50Table 2.3External costs of harmful alcohol use in 11 EU-15 Member States and fourother countries52Table 2.4Alcohol excise duties in the European Union in 200855Table 2.5Effectiveness of restraining harmful alcohol use through regulatory measures62Table 3.1Gross tax rates, EU lotteries75Table 3.2Maximum tax rates on casino GGR, 200476Table 3.3Participation in modes of gambling and other ‘Vices’: correlation coefficients(p-values in parentheses)Table 3.487Levels of spending on modes of gambling and other 'Vices' correlationcoefficients (conditional on spending a positive amount on each product withineach pair) (p-values in parentheses)888

List of boxesChapter 1EU rules for excise duty on cigarettes19Chapter 2Acquis communautaire for alcohol in the European Union609

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION:10

PREFACEPrefaceThe harmful effects of smoking, drinking and gambling are very much in the news these days.Smoking is the leading cause of death in the European Union; Europe consumes half of allalcohol produced in the world, although it accounts for merely 7% of the world’s population;and the advance of internet gambling rapidly erodes government’s grip on this activity. Theeffects of smoking, drinking and gambling have been thoroughly researched in recent years instudies commissioned by the European Commission. Tobacco or Health in the European Union:Past, Present and Future (The Aspect Consortium, 2004), Alcohol in Europe: A Public HealthPerspective (Anderson and Baumberg, 2006), and Study of Gambling Services in the InternalMarket of the European Union (Swiss Institute of Comparative Law, 2006) have done much toreview, analyze and make people aware of the prevalence and social costs of smoking, drinkingand gambling.Less attention has been paid, however, to the use of tax and regulatory instruments tointernalize the external effects of the abusive consumption of tobacco, alcohol and gamblingand to restrain consumption by the young who are ill-informed about the dire consequences oftheir behaviour or discount the short-term effects more heavily than the long-term effects. Thethree studies in this volume attempt to fill this void. They provide a balanced judgment of thewelfare effects of government intervention in smoking, drinking and gambling markets.Accordingly, the studies form a useful complement (and sometimes antidote!) to the cost-ofillness research conducted by public health experts.The studies grew out of a symposium organized by Sijbren Cnossen under the auspices of theEuropean Commission, CPB Netherlands Bureau for Economic Policy Analysis and MaastrichtUniversity. The symposium was attended by tax and health specialists from nearly all EUMember States, as well as by officials from the European Commission and representatives ofvarious non-governmental organizations and industry. Thanks are due to the EuropeanCommission and the International Tax and Investment Center for making the symposiumpossible. Simone Pailer, Annemarie Spaans and Jeannette Verbruggen provided administrativesupport, which is gratefully acknowledged. Judith Payne did a splendid job in preparing thestudies for publication. Last but not least, the editor wishes to thank the authors, discussants andoutside referees for their unstinting cooperation.Coen TeulingsDirector CPB11

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: PREFACE12

SUMMARYSummaryThe economic issues related to the taxation of tobacco, alcohol and gambling are among themost interesting issues to study, yet they receive relatively little attention in the professionalliterature. This contrasts sharply with the widely discussed research reports, published amongothers by the European Commission, on the harmful effects of smoking and drinking. Thesereports, however, do not draw a systematic economic link between the abusive consumption oftobacco and alcohol and their taxation and regulation. This is also true for gambling, whichdoes not fall under the Commission’s harmonization mandate.The following three studies attempt to fill this void. Broadly, they identify four main economicpolicy issues in imposing excise duties on tobacco, alcohol and gambling: (1) the revenueraising efficiency of such duties; (2) their potential role in correcting negative externalities; (3)their distributional incidence; and (4) the need for duty coordination in the European Union.Last but not least, the studies discuss the complementary role of regulatory measures incurtailing harmful consumption.Most excise duties on tobacco, alcohol and gambling are low-cost sources of revenue, becausethe products are easy to identify, the volume of sales is high and the number of producers ormarketing outlets is limited. At the same time, the studies note that the price elasticity ofdemand for the excisable products is not so low that, on efficiency grounds, they should betaxed in excess of the duty level that corresponds to the external costs attributable to theirconsumption. Beyond this level, an increase in the rate of the value added tax would seemindicated if more revenue is required. In short, the Ramsey rule has limited application.Much discussion is devoted to the difficulties in designing (marginal) excise duties in line withthe (marginal) external costs caused by harmful consumption. This is shown to be exceedinglycomplex, because the welfare gains from a reduction in socially costly consumption, induced bythe higher duty, must be balanced against the welfare loss from a fall in moderate non-harmfulconsumption. Perhaps tobacco is an exception, since the relationship between marginal duty andexternal cost is largely linear. Interestingly, and in contrast to conventional Pigouvian analysisbased on the rationality axiom, recent research indicates that ‘sin taxes’ can improve Paretooptimality, if it is assumed that some consumers may have self-control problems.Generally, excise duties on tobacco, alcohol and gambling are distributed regressively whenmeasured against income. It is also observed that the rich benefit from the gambling proclivityof the poor if the proceeds of the stakes are spent on income-elastic services, as they often are.Some recent publications posit that the poor, who as a group smoke more than the rich, tend tobenefit most from an excise-induced cutback in smoking if they value the constraint on theirbehaviour. In that sense, the duty has a progressive incidence.13

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: SUMMARYCoordination of excise duties, in the form of minimum duty levels, is important in the EuropeanUnion if socially wasteful cross-border shopping activities, induced by high excise dutydifferentials, are to be reduced. In half of all Member States, for instance, there is no exciseduty on wine. Minimum excise duties on other alcoholic beverages have not been adjusted since1992. Tobacco excise duties in the United Kingdom are more than three times the level found inSpain. Recently, the European Commission has proposed increasing the agreed minimumtobacco duties, even though smuggling and counterfeiting activities are flourishing. Internetbetting is an example of a rapidly eroding tax base.Clearly, taxation and regulation must be viewed as complements. Indeed, where Pigouviantaxation runs into targeting problems, regulations aimed at specific problem groups can be usedeffectively to curb negative externalities. Bans on smoking in public places have done much toreduce passive smoking harm (unfortunately, not within the family), while minimum purchaseages, server legal liability and drunk-driving countermeasures have reduced, albeit noteliminated, the external costs of abusive alcohol consumption. Limitations on the access toelectronic gaming machines – the ‘crack cocaine of gambling’ – lessen the incidence of nonrational behaviour.The main message these studies convey is that it would be unrealistic to rely solely on dutylevels and differentiation to curb abusive use. Duty levels do have a clear impact in restrainingconsumption by children and young adults – an important priority for policy. Butcomplementary policies – including direct regulation and the provision of information – alsohave a meaningful role to play in each of the markets for tobacco, alcohol and gambling.14

SUMMARYNederlandse samenvatting (Dutch summary)De economische vraagstukken die verband houden met de belasting van tabak, alcohol enkansspelen vormen interessante onderwerpen van studie, zij het dat zij betrekkelijk weinigaandacht krijgen in de wetenschappelijke literatuur. Dit staat in scherp contrast met de breedbediscussieerde onderzoeksrapporten, onder meer gepubliceerd door de Europese Commissie,over de schadelijke effecten van roken en drinken. Deze rapporten leggen echter geensystematisch verband tussen de excessieve consumptie van tabak en alcohol aan de ene kant, ende belasting en regulering daarvan aan de andere kant. Dit geldt ook voor kansspelen, die nietonder het harmonisatiemandaat van de Commissie vallen.De volgende drie studies proberen in deze leemte te voorzien. Breed gezegd identificeren zijvier belangrijke economische beleidsissues inzake de heffing van accijnzen op tabak, alcohol enkansspelen: (1) de opbrengst-efficiency van de heffingen; (2) hun potentiële rol in hetcorrigeren van negatieve externe effecten; (3) de drukverdeling van de heffingen; en (4) debehoefte aan accijnscoördinatie in de Europese Unie. Last but not least, analyseren de studies decomplementaire rol van regulering bij het beteugelen van schadelijke consumptie.De meeste accijnzen op tabak, alcohol en kansspelen zijn ‘goedkope’ bronnen vanoverheidsinkomsten, omdat de producten gemakkelijk zijn te identificeren, de afzet groot is enhet aantal producenten of verkooppunten gering. Daar staat tegenover dat de studies aangevendat de prijselasticiteit van de vraag naar deze accijnsplichtige goederen niet zo laag is dat zij, opefficiency gronden, hoger zouden moeten worden belast dan overeenkomt met de externekosten die aan hun consumptie zijn verbonden. Boven het niveau van de externe kosten lijkt eenverhoging van het BTW-tarief geïndiceerd, indien de schatkist moet worden gespekt. Om kortte gaan, de Ramsey-regel is slechts beperkt toepasbaar.Veel aandacht wordt besteed aan de problematiek van de vaststelling van het (marginale)accijnstarief dat overeenkomt met de (marginale) externe kosten van schadelijke consumptie.Dit blijkt een buitengewoon complex vraagstuk te zijn, omdat het welvaartsvoordeel van eenvermindering van maatschappelijke kosten veroorzakende consumptie, teweeggebracht door dehogere accijns, moet worden afgewogen tegen het welvaartsverlies van een verlaging vangematigde, niet-schadelijke consumptie. Waarschijnlijk vormt tabak een uitzondering op dezeregel, omdat het verband tussen het marginaal tarief en de externe kosten van roken grotendeelslineair is. Interessant is dat recent onderzoek – in tegenstelling tot de gebruikelijke Pigoviaanseanalyse gebaseerd op het rationaliteitscriterium – aantoont dat ‘zondebelastingen’ de Paretooptimaliteit kunnen verbeteren als wordt aangenomen dat sommige consumenten aan eengebrek aan zelfcontrole lijden.15

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: SUMMARYIn het algemeen is de drukverdeling van accijnzen op tabak, alcohol en kansspelen, naarinkomen gemeten, regressief: lagere inkomensgroepen betalen verhoudingsgewijs meer danhogere inkomensklassen. Ook wordt opgemerkt dat welgestelden voordeel hebben van degoklust van arme mensen, indien de opbrengsten van kansspelen ten goede komen aaninkomenselastische diensten (musea, concerten, etc.), zoals vaak het geval is. Sommige recentepublicaties wijzen erop dat arme mensen, die als groep meer roken dan rijke paffers, voordeelhebben bij een accijns-geïndiceerde vermindering van de tabaksconsumptie, indien zij debeteugeling van hun schadelijke gedrag positief waarderen. In die zin heeft de accijns eenprogressieve neerslag.Coördinatie van de accijnzen, in de vorm van minimumtarieven, is in de Europese Unie vanbelang indien het gewenst is sociaal-verspillende grensoverschrijdende winkelactiviteiten,veroorzaakt door hoge accijnsverschillen, te verminderen. De helft van alle lidstaten,bijvoorbeeld, heffen geen accijns op wijn. Minimumaccijnzen op andere alcoholische drankenzijn sedert 1992 niet meer verhoogd. De tabaksaccijnzen in het Verenigd Koninkrijk zijn meerdan drie maal hoger dan het niveau in Spanje. Recentelijk heeft de Europese Commissievoorgesteld de overeengekomen minimum tabaksaccijnzen te verhogen, hoewel de contrabandewelig tiert. Internet gokken is een voorbeeld van een snel eroderende heffingsgrondslag.Belastingheffing en regulering zijn duidelijk complementaire instrumenten. Waar Pigoviaansebelastingheffing niet doeltreffend is, kan regelgeving voor specifieke probleemgroepen effectiefworden gebruikt om negatieve externe effecten te beteugelen. Het verbod op roken in publiekeruimtes heeft veel gedaan om de schadelijke effecten van passief roken te verminderen (helaas,niet in gezinsverband), terwijl minimum koopleeftijden, wettelijke aansprakelijkheid vanserveerders en verkopers, en maatregelen tegen rijden onder invloed de externe kosten vandrankmisbruik hebben teruggedrongen, zij het niet geëlimineerd. Beperkingen op de toegang totelektronische gokmachines – de heroïne van de gokwereld – verminderen het voorkomen vanniet-rationeel gedrag.De belangrijkste boodschap die de studies over het voetlicht brengen is dat het niet realistischzou zijn om teveel vertrouwen te stellen in het niveau en de structuur van accijnzen bij hetbeteugelen van misbruik. Wel is het niveau van de accijns duidelijk van invloed op hetterugdringen van de consumptie door kinderen en jongeren – een belangrijke beleidsprioriteit.Maar complementair beleid – met inbegrip van directe regulering en voorlichting – kan ook eenrol van betekenis spelen in elk van de markten voor tabak, alcohol en kansspelen.16

INTRODUCTION1Restraining the golden weed: taxation and regulation oftobaccoStephen Smith This paper considers the key economic considerations in tobacco tax policy and its interactionwith regulation. How far are high taxes on cigarettes justified by the external costs of smoking,and what other considerations should inform policy decisions about the appropriate level andstructure of tobacco taxation? The paper discusses the definition and measurement of theexternal costs of smoking, and the implications of these costs for tobacco taxation andregulation. Wider issues in tobacco taxation are then considered, including revenue-raisingefficiency, the tax base, distributional aspects, and the international dimension to tobacco taxpolicy.1.1IntroductionSome European countries – the UK, Ireland and France – impose very high excise taxes oncigarettes, in excess of 3.00 per pack of 20 cigarettes (Table1.1). Since cigarettes are alsosubject to value added tax (VAT) at the standard rate, over three-quarters of the retail price ofcigarettes in each of these countries consists of tax. Some other EU Member States haveconsiderably lower taxes, though all levy some additional excise tax on cigarettes, over andabove the standard rate of VAT. On average, Member States raise revenues of some 160 perhead of population from the cigarette excise, a substantial revenue contribution from a tax on asingle good, consumed – in nearly all Member States – by considerably less than one-third ofthe adult population. Although originally tobacco may have been taxed more heavily than othergoods simply because high taxes on tobacco were cheap to collect and easy to enforce, thetaxation of cigarettes and other tobacco products is increasingly being seen, alongside otherregulatory instruments, as a way of reducing the harm done by smoking. This paper considers,from an economic perspective, the efficient use of tobacco taxes both as a source of revenueand as a regulatory instrument. How far are high taxes on cigarettes justified by the externalcosts of smoking, and what other considerations should inform policy decisions about theappropriate level and structure of tobacco taxation? The author is grateful for the comments made by the discussants, Anil Markandya and Markku Pekurinen, otherparticipants at the seminar, Sijbren Cnossen and two anonymous referees.17

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: RESTRAINING THE GOLDEN WEED:TAXATION AND REGULATION OF TOBACCOTable 1.1Taxation of cigarettes in EU Member States, July 2008MemberRetail price per packTotal excise taxof 20 cigarettes,per pack (excl.(MPPCb)VAT), (% of retail price)(incl. VAT)per capita, 401.53649143Czech. a1.450.755247223.332.006132160StateaTotal excise tax perSpecific excise Cigarette excise taxpack (excl. VAT) as % of total taxrevenue in 2005,EU average(unweighted)Source: European Commission Excise Duty Tables, ref. 1.024 (revenues) and ref. 1.027 (duty rates).aRanked in descending order of total excise tax per pack in euros.bMost Popular Price Category.For European Union members, this is an issue with an important EU policy dimension. Nationalpolicies with regard to tobacco taxation and regulation are constrained by EU agreements on thelevel and structure of excises, and by EU rules governing the free movement of goods in theinternal market. The rules on excises are briefly summarized in Box 1, and further discussion,including details of transitional provisions for countries that have recently joined the EU, can befound in Cnossen (2007). The openness of EU economies, and legal judgments that havereinforced rights to free movement, place considerable constraints on national excise taxpolicies, in some respects more severe than the competitive and legal constraints on state-leveltobacco tax policies in the United States. The result is that EU policy towards tobacco taxes and18

INTRODUCTIONregulation plays an important role in determining the agenda of feasible policy action inMember States.EU rules for excise duty on cigarettes All Member States are required to impose a duty on cigarettes, which should contain both price-related (‘advalorem’) and quantity-related (‘specific’) components. In addition, Member States should impose VAT on cigarettes and other tobacco products at their standardrate (which EU rules require to be at least 15%). The VAT applies to the excise-duty-inclusive price. For the purposes of defining the excise duty rates and structure, a reference price is defined for the MostPopular Price Category (MPPC) in each Member State. This varies between Member States depending onmarket conditions, purchasing patterns, etc. The minimum total excise duty on cigarettes in the MPPC from 1 July 2006 should be 64.00 per thousandcigarettes ( 1.28 per pack of 20). In addition, for Member States with excise duty below 101.00 per thousand cigarettes, there is a furtherrequirement that for cigarettes in the MPPC the total excise duty should be at least 57% of the total taxinclusive retail selling price. The balance between ad valorem and specific components in the cigarette excise should be such that thespecific element is between 5% and 55% of the total tax (including VAT) levied on the MPPC.In July 2008, the Commission proposed a directive (COM(2008)459/2) which would make various changes to theserules: Taxes would no longer be defined in relation to the MPPC but in relation to the Weighted Average Price(WAP) of cigarettes sold in each Member State. A phased increase in minimum duty levels and rates would take place over the period to January 2014, withthe minimum excise duty rising from 64.00 to 90.00 per thousand by 2014 and the minimum percentage ofduty in price rising from 57% to 63% (of the WAP). The required balance between specific and ad valorem elements would be shifted towards the specific excise,which should lie in the range 10–75% of total tax.The paper draws on existing research from various sources, including earlier contributions onthe economics of tobacco taxation 1, but does not aim to present a comprehensive survey of thevery large literature on all aspects of smoking behaviour, regulation and social costs. Followingthis introduction, Section 1.2 discusses the definition and measurement of the external costs ofsmoking; Section 1.3 then discusses the implications of these costs for tobacco taxation andregulation. Section 1.4 considers wider issues of efficiency in tobacco taxation, including thepotential contribution to revenue-raising efficiency and the efficient specification of the taxbase. Section 1.5 then discusses distributional concerns about high tobacco taxes and Section1Key contributions include Manning et al. (1989), Grossman et al. (1993), Viscusi (1995, 2006), O’Hagan (1998), Evans,Ringel and Stech (1999), Chaloupka et al. (2000), Gruber (2001), Cnossen and Smart (2005) and Cnossen (2006).19

TAXATION AND REGULATION OF SMOKING, DRINKING AND GAMBLING IN THE EUROPEAN UNION: RESTRAINING THE GOLDEN WEED:TAXATION AND REGULATION OF TOBACCO1.6 considers the international dimension to tobacco taxation – in particular, the consequencesof the wide differences in taxes across the EU. Section 1.7 draws some conclusions.1.2The external costs of smoking: definition and measurementThe external costs associated with the consumption of goods such as tobacco and alcohol – inother words, costs that are borne by people other than the individual smoker or drinker –constitute the least-controversial justification for public policies, including tax policies, toregulate and restrict their consumption. For most goods, we may think that individualconsumers are best placed to identify the pattern of consumption that best satisfies their needs,and to decide whether or not to purchase a particular good on the basis of whether the benefitsof consuming it are sufficient to justify the price. However, for goods that impose costs onpeople other than the individual decision-maker, we cannot assume that individual decisionmaking will result in the socially optimal pattern of consumption. In the case of tobaccosmoking, these external costs include direct effects on other people, such as the annoyance andhealth damage caused by passive smoking, and collectively borne costs such as the cost ofpublicly funded medical treatment for smoking-related conditions. The existence of theseeffects means that individual consumption decisions will not reflect the full social costs ofconsumption, because individual consumers do not bear the marginal costs of medical treatmentor of direct externalities that follow from their smoking behaviour. Externality-correcting taxesor other forms of regulation will be needed to ensure that such costs are properly reflected inindividual consumption decisions.The costs that are relevant to this argument are those borne by people other than the individualsmoker or by society collectively. Smoking involves various consequences – many of themadverse – that extend beyond the immediate pleasure of consumption to the individualconsumer. Frequently, the discussion of whether smoking is socially harmful includesdiscussion of the consequences for the individual consumer’s own health, employ

2.4.2 Setting the level of the alcohol excise duty 56 2.4.3 Alcohol excise duty coordination 58 2.5 Alcohol regulation 60 2.6 Implications for the EU's alcohol tax policy 63 Discussion 64 3 Gambling policy in the European Union: too many losers? 69 3.1 Introduction 69 3.2 Similarities and differences in the analysis of gambling and other .

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