Tuesday, 29 December 2015

Tobacco Monopolist Auction

Competition is usually a good thing. It plays out in different ways depending on lots of factors but the general effects are that prices are suppressed and markets are expanded. Normally this is great, but there are exceptions. Sometimes societies prefer the opposite outcomes: higher prices and contracting markets.

That's one reason why tobacco is taxed heavily and why some advocate taxing sugary drinks. In the case of tobacco further effort is devoted to designing and enforcing other constraints, such as cabinets to hide the tobacco products in-store and plain packaging rules.

Here's another possibility: pass a law to create a statutory monopoly for tobacco products and then auction off the right to be the monopolist for a defined period of time (eg 5 - 10 years). I see it playing out like this.
  • Since only one firm is allowed to sell tobacco it will set monopoly prices which will burn off some demand by themselves.
  • Taxes can still be imposed on top of the monopoly prices, ideally Pigouvian taxes aimed at roughly pricing the externalities associated with smoking.
  • A large chunk of the monopoly profit will be captured by the state as tobacco companies compete to win the monopoly rights.
Comments welcome of course. I'm not aware of precedents for this approach. The most obvious objection is perhaps that it might breach international trading rules, but against this I'd note that all firms have the opportunity to be the monopolist. We'd still have competition, but it'd be competition for the market rather than in the market.

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