Against Smoking Bans in “Public Spaces”

In Canada, the government prohibits smoking in “indoor public spaces,” which, according to the law, consist of bars, restaurants, bowling alleys, etc. The term “indoor public spaces,” however, is misleading: they are public only in the sense that there are other people sharing the space, yet, many of these “indoor public spaces” are owned by private individuals. There are several reasons for protecting their right to choose whether they want a smoke-free or smoke-filled establishment.

Many complain that smoking in bars is encouraging to nonsmokers and exposes them to secondhand smoke. There are many reasons why this argument may not hold. For now, though, it is more important to focus on the demonization of smoking. By categorically prohibiting restaurant owners from allowing their customers to smoke inside, the government prevents people from doing something they may want to do, i.e. to smoke in a bar or own a bar that allows smoking). Smoking is not good or bad “in itself,” but, rather, it is only good or bad according to individual preference, including, but not limited to, the tradeoff of overall health for immediate pleasure, the terms of which some individuals would happily agree with. Moreover, there is an enormous amount of information detailing the economic, health, and social harms associated with smoking available to consumers that allows them to choose intelligently.

A popular argument for banning smoking in indoor public spaces pertains to workers’ rights: smoking indoors threatens employee health and welfare and because many workers do not have the convenience of choosing their place of employment–so the argument goes–allowing it forces them to choose between inhaling toxic cigarette fumes and unemployment.

To some extent, indoor smoking harms workers. Does that really justify banning it?

Closer examination of firm behavior demonstrates that it varies based on the economic implications of “safety.” Between 2008 and 2010, 700 construction workers died from workplace injuries in Canada. In addition, 637 individuals died in manufacturing workplaces and 329 in the transportation industry. Although these numbers may seem surprising, the theory of compensating differentials explains why outcomes in some industries differ from those in others.

According to the compensating wage differentials theory, workers are compensated by firms in a number of ways: these include wages, nonwage benefits, and working conditions. Any given individual has a set of preferences between these forms of compensation. A risk adverse employee, for instance, may be willing to give up much of his paycheck for a little more safety. Someone comfortable with risk, however, could be willing to put herself squarely in danger’s way for better pay. That some individuals are comfortable with more risk explains why construction workers, for instance, agree to work in dangerous settings: higher compensation allays most concerns, whereas lower compensation highlights them. Firms need to offer compensation for labour to attract workers—when they decrease safety, labour supply shrinks and forces the firm to boost wages. Thus, there is a positive correlation between risk and compensation. And there is no authoritatively “ideal” level of risk; instead, there is a multitude of individually preferred ones.

Thus, to attract workers, owners of establishments that allow smoking indoors would need to offer wages high enough to distract employees from the health hazard associated with working there (assuming these concerns are present). For some workers, the increase in pay would offset their health concerns. Similarly, restaurant owners must consider whether indoor smoking discourages consumers from eating at their establishment. If there is growing opposition to smoking, for example, restaurant owners must choose between allowing customers to smoke indoors and losing whatever percentage of their customer base that refuses to eat in an establishment that permits indoor smoking.

Examining both consumer and employee perspectives on smoking indoors lead to a common conclusion: laws dictating firm behavior typically enforce an arbitrary standard and ignore individual preferences. Instead, the government should allow property owners to decide what is best for their respective establishments and let people pursue their individual desires freely.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Debating Revenue-neutral Carbon Taxes

During the 2008 federal election, proposals to implement a federal carbon tax were a major point of contention. Although Canadian voters ultimately rejected the plan, the issue of carbon pricing remains at the forefront of environmental discourse. This is for good reason: climate scientists, having shown conclusively that the earth is warming, now mostly concern themselves with both the size of the effect, in addition to its primary determinants.

In 2007, the Province of British Columbia (BC) successfully implemented a carbon tax with an important feature: revenue neutrality. The government expected to generate nearly $5 billion annually via carbon taxation and, accordingly, it would reduce personal and corporate taxes by an equal amount. This, in effect, slays one substantial criticism of a carbon tax, which is that it amounts to an additional overall tax burden on individuals, families, and firms. In British Columbia, the policy managed to deter purchases of gasoline and other carbon-intensive products by nearly 10 per cent relative to the rest of Canada, without burdening British Columbians with additional taxes.

Granted, those statistics only measure the carbon that British Columbians purchase in BC. They do not consider the stories of weekend lineups at American border towns where Canadians buy cheaper gas now that the price difference is large. This phenomenon may certainly account for some of the change, but it is quite difficult to imagine this effect being substantial. How much gas must a Vancouverite purchase to justify the two-hour drive, plus the wait in line?

Carbon pricing is also part of the discussion in Atlantic Canada.

In a series of papers published in 2009, University of New Brunswick economist Joe Rugger analyzes the environmental and taxation implications of a BC-styled revenue-neutral carbon tax in New Brunswick. The study found that a tax equivalent of 7 cents per liter on gasoline, applied to all forms of fossil fuel, would reduce carbon emissions in the province by roughly 7.5 per cent. This would occur primarily through higher electricity and heating bills, in addition to consumer purchases of gasoline and oil.

Changing carbon consumption occurs because of two opposing forces. First, making gasoline more expensive creates a “price effect” that causes people to shift their consumption away from gas and towards other things. This is what people refer to when they talk about nudging consumer behavior in a direction hoped to be socially beneficial. The second effect is due to the decreased tax burden–the “wealth effect.” Here, income goes up because of a smaller tax burden. People will then tend to consume, on average, slightly more of everything, including carbon. This works in the opposite direction of the price effect. In the case of BC, it became clear that the price effect was larger than the income effect and, therefore, total consumption was less than it would have otherwise been.

This highlights a confusing irony of carbon pricing policy–anything that makes people richer will tend to mean that they consume more carbon. People should continue to prosper; however, the primary objective is reducing carbon consumption. There are also distributional effects that occur based on the form and target of the tax cuts, as well as consumption behavior. This will be the topic of a second blog post.

In sum, Canadians are becoming more environmentally conscious and they recognize the need for not only fiscal, but also ecological, prudence. In this light, carbon-pricing policies are likely to remain in public discourse. By pairing the carbon tax with associated general tax cuts, rendering it revenue neutral, British Columbia’s experiment shows that it is at least possible to deter carbon consumption, while also minimizing harmful economic effects.

With the upcoming New Brunswick election in the fall of 2014, I would not be surprised if this issue arrives on the campaign trail. Considering recent curiosity in New Brunswick about local shale gas development, this policy has the potential to become quite the wedge issue.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The economic and moral benefits of ending Canada’s postal monopoly

Currently, Canada Post holds a monopoly on the delivery of first-class mail in Canada. The Canada Post Corporation Act affords it the “sole and exclusive privilege of collecting, transmitting, and delivering letters” within the country. Exceptions to this rule are limited.

There are several economic reasons for liberalizing postage in Canada by ending the Crown corporation’s monopoly. Since they are sheltered from market competition, for instance, monopolists can raise prices higher than firms in a competitive market could. The firm’s additional revenue stemming from its unique ability to participate in its market is termed monopoly rents. These rents reflect the difference between the firm’s prices and opportunity costs, which tend to converge in competitive markets as companies undercut each other until the process becomes unprofitable.

Sensing this advantage–that is, the ability to extract additional rents via monopoly status–unions typically bargain for some portion of these rents in the form of higher wages, favourable working conditions, and so forth. Nevertheless, this increases the firm’s costs.

Canada Post faces a difficult financial position because it allowed unions to absorb these rents. However, the emergence of newer, more efficient technologies eroded its ability to sustain higher levels of worker compensation. It manages these hardships by reducing costs by diminishing services, which has the counterproductive effect of exacerbating declining demand for its product. For instance, it announced plans to end mail delivery to urban homeowners and it has increased its stamp prices to offset its financial difficulties.

Importantly, though, Canada Post has the ability to impose these reforms only because consumers do not have a viable alternative for first-class mail delivery and other essential postal services.

By opening the postage market to competition, firms would need either to offer services closer to cost or offer better service than their competitors. Theory suggests, and empirics confirm, that liberal reforms in would reduce prices and increase the amount of options available to consumers, which, in the case of Austria, the Netherlands, and Germany–countries that liberalized their postal markets–is true.

Proponents of Canada Post’s monopoly suggest that it provides equal rates across the country, which allows the outfit to provide “affordable mail service” to rural Canadians. Yet, it is not entirely certain that competing firms could not offer cheaper rates in these areas than Canada Post. Furthermore, it is not necessarily clear why the postage industry has an obligation to equalize rural and urban Canada in the first place.

The monopoly on mail service in Canada also adversely affects free speech. In early March 2014, Canada Post apologized for delivering offensive pamphlets prepared by the People’s Gospel Hour to thousands of Labradorians. The mail-outs quoted the Bible in an attack against homosexuality. These situations raise an ethical dilemma about Canada Post’s ability to act as both a conduit of Canadian values and a service-provider.

Canada Post is a crown corporation chartered by the Canadian government, which promotes certain values and, therefore, it cannot sensibly deliver mail that is questionable in content. Conversely, it is the only firm permitted to deliver certain documents and packages and it cannot refuse certain mailing orders without violating freedom of speech (at least theoretically).

Ending the mail monopoly, and thereby allowing private individuals and firms to deliver letters, would solve this quandary – neither Ottawa, nor Canada Post, would have to implicitly support the dispersion of bigoted materials in order to safeguard freedom of speech and censored groups could seek alternative options for delivering said material. In other words, Canada Post employees would not be the ultimate arbiters of what is “acceptable” for delivery.

In any case, Canada Post’s monopoly is both uneconomical and ethically challenged, and allowing competitive forces to govern the Canadian postal market is a viable alternative. Unlike the current structure, for instance, private competition could allow for better quality and more affordable service, not to mention that, most importantly, it would quash concerns about the government’s role in deciding between decency and free speech.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute