Curbing Negative Externalities

**IMPORTANT: This article contains mentions of tobacco and nicotine usage. If you feel uncomfortable with these topics, please refrain from reading.

In economics, we are taught that the one long-term goal of any firm is to earn a profit, and as much profit as possible. By maximizing profit and revenue, firms can stay in their respective industries and continue generating returns for stakeholders. Sometimes, the profit firms generate comes at a societal cost.

Recently, Juul has been ordered to pay $462 million to the states New York, California, Colorado, Illinois, Massachusetts, New Mexico, and to Washington D.C. for deceptive marketing. (1) In the US, tobacco products may only be sold to individuals of at least 21 years of age; in March 2023, there were roughly 6000 lawsuits filed against the firm for marketing its products to underage consumers. (2) In addition to these state lawsuits, Juul has paid roughly $1.7 billion to settle thousands of other lawsuits related to deceptive marketing and to deal with the long-term repercussions of consuming electronic cigarettes. (3)

In the United States, due to our lax policies regarding the production of cigarettes and e-cigarettes, we have a thriving cigarette industry with several large firms. Some of the largest traditional cigarette manufacturers are Altria Group, Reynolds American Inc., and British American Tobacco, and some of the largest e-cigarette manufacturers are Juul, Vuse, and NJOY.

While many of these firms have been hit by lawsuits over the past few decades, none have been as targeted as Juul; while each firm sells similar products, marketing is the distinguishing factor at play. As I explore the government’s role in regulating firms like Juul, I will focus specifically on the city of Chicago.

Let’s first take a look at the policies affecting tobacco production, sale, and consumption in Chicago. The following graphic presents a layered perspective to local policy: local individuals are affected by policies at the national level, state level, and city/municipality level. While national policy affects everyone, state policy is more restrictive, and city policy (determined by local governments) varies even within a single state.

At the national level, the FDA (Food and Drug Administration) regulates the production and sale of tobacco products. (4) This power was granted by the Family Smoking Prevention and Tobacco Control Act of 2009 and requires manufacturers to receive FDA approval before selling any tobacco product. In 2016, the FDA doubled down, expanding the definition of tobacco products to include e-cigarettes, cigars, and other tobacco products. At the state level, the Illinois government has passed specific legislation to limit the sale of nicotine and tobacco-containing products. In 2019, the government passed Tobacco 21, making Illinois the seventh state in the nation to raise the legal purchase age from 18 to 21. (5) Additionally, the Prevention of Tobacco Use by Persons Under 21 Years of Age and Sale and Distribution of Tobacco Products Act (long title, I know) prohibits the distribution of nicotine and tobacco samples to the public as well as the sale of tobacco and nicotine-containing products to individuals under 21 years old. (6) Finally, the city of Chicago itself has adopted policies to limit tobacco and nicotine consumption in public spaces. The Smoke-Free Parks Policy prohibits smoking in 580 parks, playgrounds, and beaches in the area. (7)

So, what does tobacco and nicotine control look like in Chicago? Well, the national government seems to be intent on limiting production. The state government appears to be controlling tobacco and nicotine sales. The local government appears to be limiting product usage. From this overview, it seems as if every “step” in the production-consumption chain is covered.

However, in Chicago, roughly 28% of high school students and 11% of middle school students said they used e-cigarettes within the last month, with approximately 60% of high school users purchasing from Juul. (8) If, from a policy perspective, tobacco and nicotine products are tightly regulated, why are so many adolescents still using these products and why is Juul so attractive to this young audience? More statistics reveal the true issue. From 2018 to 2019, e-cigarette use for individuals between ages 15 and 34 rose from 6.1% to 13.5% and a 2017 study suggests that 8% of Americans aged 15-24 used Juul in the 30 days prior to data collection. (9, 10)

I posit that since its inception Juul’s (and other similar firms’) main market has been adolescents. While new legislation has prohibited sales to individuals under 21, Juul has continued targeting its marketing efforts towards its target market. The compact flash drive appearance of Juul products and the creation of nicotine flavors such as mango and mint support this. In fact, data suggests that most adolescent Juul users prefer flavored products, with mint and menthol being the most popular. However, it is only natural for firms to seek to earn profit. From a health policy perspective, it is the role of the government to improve societal wellness at the expense of individual firms, individuals, or markets.

Let’s focus on “societal wellness.” This is a hard term for me to define, but for this topic, I will say that this term refers to the long-term individual and community health of those affected by said issue. As I focus this article around Juul and e-cigarettes, I will concentrate specifically on nicotine products. As of February 2020, there have been roughly 2,807 cases of hospitalization associated with e-cigarettes and vaping in the United States. (12) Nicotine (just like tobacco) is highly addictive and results in 3 important long-term health issues: increased risk of blood clotting, lung damage and inflammation, and cardiovascular disease. (13, 14) In fact, tobacco and tobacco-related products kill over 8 million people annually, with roughly 1.2 million deaths due to second-hand exposure. (15)

An externality is a “positive or negative outcome of a(n) activity that affects a third party … not directly related to that activity.” (16) At the start of this article, I offered a means of framing this issue: companies focus on profit generation sometimes at the expense of societal wellness. Tobacco and nicotine products create a negative externality, a negative activity that affects non-purchasing individuals.

I have provided data suggesting that despite policy implementation, this issue is growing. But how can we hold firms like Juul accountable? While Juul has been hit by hundreds of lawsuits, the firm remains highly profitable because nicotine is addictive, and unless programs are implemented to support current users, legal action and financial penalties will likely not mean much.

There are many firms and industries that produce some sort of negative externality; examples include Chevron (involved in fracking), Exxon Mobil (involved in oil and natural gas production), and the Red Chamber Group (involved in fishing). Many of these firms benefit society in some way and are heavily regulated. While it is in the best interest of corporate owners to create profit, governments must regulate these industries to balance corporate profitability and “societal wellness”.

Juul’s deceptive marketing practices have pitted the company against national, state, and local governments which aim to regulate tobacco and nicotine sales. Ultimately it is up to our elected officials to strike a delicate balance between societal well-being and business interests by implementing legislation and by providing support for affected individuals.