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Debate: Ending EU subsidies for the tobacco industry

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Should the European Union stop subsidising tobacco?

Background and context

Subsidies are payments by governments to private industry which effectively lower the costs of production, making it cheaper to operate in a particular area. Ease of access to large markets makes the EU an attractive place to operate, although recent drives to ban advertising and to heighten awareness of the risks of smoking mean that marketing is increasingly focused in developing countries. The generic issue with subsidies is their distortion of the market, meaning that industrial decisions are taken without full regard to true costs (economic inefficiency) and that resources may not be directed to their most productive areas (allocative inefficiency).Tobacco (or rather the products it is developed into) is a ‘demerit good’ i.e. it tends to be overconsumed as consumers are unaware of the full (e.g. health) costs they will suffer. It also damages third parties who do not themselves smoke, thus causing ‘negative externalities’. Governments must therefore balance the benefits of securing employment and tax revenue with the social costs linked to the industry. Although this debate focuses on subsidies given by the EU, the international ramifications of changing these must not be forgotten.

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Argument #1

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Yes

It is morally reprehensible for taxpayer’s money to be used on products which are demerit goods, and which generate negative externalities. Governments have the responsibility to care for the health of their citizens, rather than subsidising production of goods which damage it!

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No

The paternalist model of government is outdated and will generate resentment. Citizens have the fundamental right of free choice in deciding what products to buy; a government’s policy decisions should not be swayed by dubious and patronising moralising.

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Argument #2

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Yes

Subsidising tobacco runs counter to the whole trend of emphasis on anti-smoking campaigns, banning cigarette advertising, etc. It also merely increases healthcare costs met by governments in the EU. Subsidies confuse the message sent to the consumer-and-citizen.

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No

It would be wrong to see policy on tobacco as a simple moral choice. State paternalism, still an extent force in much of the EU, must think about employment and welfare provision as well as anti-smoking. The main role of subsidies is to protect farmers from price volatility that can drive many small producers out of business. It is still possible for governments to subsidise tobacco and advise against consumption.

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Argument #3

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Yes

Money recouped from withdrawing subsidies could be redirected to anti-smoking products, such as patches and campaigns.

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No

The American experience shows that money is more likely to be absorbed in standard budget spending. There is also limited evidence that such campaigns are effective, as there are lots of different substitutes.

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Argument #4

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Yes

Perhaps governments should avoid giving any subsidies to industries, as the distortion of the market which results leads to (economic and allocative) inefficiency. Free market prices would allow consumers to make more informed decisions.

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No

The tobacco industry will never function as a perfectly competitive market; it is naturally dominated by a small number of large firms. There is an inherent temptation to collusion in such oligopolies. Furthermore, removing subsidies would not lead to increases in price large enough to deter demand, as most of the price paid by the consumer is tax.

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Argument #5

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Yes

Removing subsidies would not only help consumers, but would inject a dose of reality into the supply side of the market. Diversification is safer than reliance on a single factory or (in less developed countries) a single cash crop. Rather than governments sheltering the industry from its true costs, producers would be encouraged to find new ways of raising revenue.

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No

In many areas this is simply impractical. Local economies depend on the income generated from employment, and in some cases benefit from industrial philanthropy. In some areas, farming conditions may not be suited to alternative crops, which tend to bring in less money (analogous to the problems of finding alternative to cocaine production in South America).

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Argument #6

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Yes

Subsidies distort international trade markets, and the EU is already under enough attack for inhibiting investment in less developed countries by paying industry to stay in Europe. Real comparative advantage can only be assessed once subsidies are removed.

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No

Does this mean tobacco is morally acceptable, as long as it is not in the EU? It is surely better to encourage the industry into areas where is will be properly regulated, than force it to move to countries with fewer restrictive laws.

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Argument #7

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Yes

Ending subsidies are a simple test for much needed reform of the outdated and costly Common Agricultural Policy. With enlargement of the EU a topical question, a model for reform is urgently needed.

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No

It is true that the CAP needs reform, but this is notoriously complex. CAP changes and enlargements are separate issues from subsidising tobacco.

See also

External links and resources

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