Economics: Should Vaping and E-Cigarettes Face the Same Heavy Government Intervention as Traditional Cigarettes?

Note: The following article was written by Rishab S, Ashwin S and Arjun C from L6. It was awarded first place in the Year 12 Economics Article competition.

Introduction

Government intervention is a process which occurs when there is market failure due to a misallocation of resources in a free market economy. There are multiple ways of this through min/max prices, indirect taxes and subsidies, etc. Smoking is a demerit good and is a severe cause of market failure due to it being an addictive good, which leads to many consumers misallocating their own scarce resources on this. However, through the use of indirect taxes, smoking has been regulated by the government due to health costs and addiction. Traditional cigarettes have already faced heavy government intervention, but they can still lead to problems. These consist of new demerit goods emerging, such as e-cigarettes and vapes. These problems can still cause implications for consumers, which brings a new question about government intervention:  Should these markets also be regulated heavily?

Some intervention is justified as it can help reduce market failure in the short term and potentially the long term, but excessive regulation could create/expand black markets and remove harm-reduction alternatives.

*This is a graph showing the % use of either smoking or vaping among youth adults and children in high school and middle school. 

Why Might Governments Intervene?

Negative Externalities

Smoking generates substantial negative externalities of consumption, meaning that the social costs of smoking exceed the private costs faced by the individual consumer. For example, smoking places a significant burden on healthcare systems. In the United Kingdom, smoking-related illnesses such as lung cancer, heart disease and respiratory conditions require extensive medical treatment funded through the NHS. Smoking also reduces labour productivity and increases absenteeism.

Estimates suggest that smoking costs the UK economy around £17 billion per year in healthcare expenses and lost productivity (ONS, 2024). From an economic perspective, this means the marginal social cost (MSC) of smoking is greater than the marginal private cost (MPC). As a result, the market equilibrium leads to overconsumption of smoking products relative to the socially optimal level.

This provides a strong justification for government intervention, such as indirect taxes or regulation, to internalise the externality and reduce consumption. However, the extent of intervention becomes less clear when considering alternatives such as vaping. If these products impose significantly lower external costs, applying the same level of intervention may lead to government failure by discouraging substitution away from more harmful cigarettes. 

Figure 1: 

Figure 1 shows the negative externalities of the consumption of cigarettes. The MSC (Marginal Social Cost) is assumed to be equal to the MPC. The optimal allocation of resources for society is at E2, as it meets at MSB and MSC. This point shows allocative efficiency in the smoking market, suggesting that government intervention is key to smoking. There is deadweight loss in the red section of the diagram. Any quantity consumer beyond E2 (the red area) suggests that the MSC > MSB, showing that it is a deadweight loss in society when it comes to cigarettes.  As we can see in this diagram, government intervention forces the smoking market to be more socially efficient and reduces the overall welfare loss to society. 

Asymmetric Information and Addiction

Another reason for intervention is asymmetric information. Many consumers may not fully appreciate the risks associated with new and emerging nicotine products, such as vaping devices and heated tobacco products. While traditional cigarettes are widely recognised as harmful, there is greater uncertainty surrounding the long-term effects of newer alternatives such as vaping.

Young consumers in particular may underestimate the addictive nature of nicotine or be influenced by marketing and social media. Evidence suggests that around 1 in 10 school pupils in England currently vape (NHS England, 2024), highlighting concerns about misinformation and youth uptake.

Nicotine products can therefore be considered de-merit goods, as they are overconsumed due to the underestimation of their long-term harms. This issue is compounded by addiction. Consumers who are addicted to nicotine are less likely to make fully rational decisions, as short-term satisfaction outweighs long-term health outcomes.

Behavioural economists argue that addiction leads to systematic biases in decision-making, meaning individuals may repeatedly make choices that reduce their overall welfare. This strengthens the case for government intervention through policies such as information provision, advertising restrictions and age limits.

However, there is also an important evaluation point. If consumers are better informed about the relative risks of different products, particularly that vaping is less harmful than smoking, intervention may be more effective when focused on improving information rather than restricting access entirely. Overly strict regulation could reduce the ability of consumers to make welfare-improving choices, particularly if vaping acts as a substitute for smoking rather than a gateway into nicotine use.

Figure 2: Tobacco taxes and consumption

Higher tobacco taxes increase prices and generally reduce consumption. Taxes can therefore help to internalise negative externalities by forcing consumers to pay a price closer to the true social cost of smoking.

Heavy Intervention

Harm reduction argument

Many economists argue that vapes are significantly safer than cigarettes. This was found out from the Public Health England, which estimates vaping to be 95% less harmful than smoking. However, due to vaping being a new product that has increased the interest of many young adults and teens, the damage that can be done is still unknown. This can be seen to be an element of Imperfect information. 

This is a government intervention that suggests that information isn’t always fully communicated and is not known. This is a primary example in the smoking market, as many people do not know the impacts and potential damage vaping has on people. 

Government Failure

Government Failure is when the government's attempts to intervene end up causing a worse market due to potential unintended consequences and maybe a further misallocation of resources. The policies the government may implement may backfire on it. An example of this in the smoking market is that high taxes may lead to an increase in the underground economy. Due to smoking being an addiction to many, the underground economy will increase a lot, as many consumers will want to buy cigarettes without tax. This can be seen as an unintended consequence for the government, causing government failure. 

Regressive Taxation

Cigarettes contain massive amounts of tobacco, which cause many consumers to become very addicted to these inferior products. This has led to tobacco taxes, which have disproportionately affected low-income households. This has led to smoking becoming higher for low-income households. This, in turn, should reduce the amount of smoking within these households.

Due to these households gaining little disposable income and cigarettes being an inferior good, the demand for cigarettes increases. This causes mass consumption, which can cause negative externalities in the economy. By implementing a regressive tax, it reduces the consumption of this good, which is a positive government intervention for this market. It can also internalise the negative externality, but not fully. 

Policy Option

Taxes

Taxes are one of many ways that the government uses to intervene in a market with high externalities - the smoking market. 

The Pros are that it reduces consumption and raises revenue for the government. Adding taxes, it increases the revenue, as shown in the diagram below. This is a positive government intervention and is shown in the box highlighted below. 

Figure 3 shows the impact on taxes on producers and consumers in the cigarette market.

The diagram shows the market with the tax present. The tax causes the supply to shift left from S to S1, which results in the price increasing due to producers wanting to maximise their profits. It shows the deadweight loss from it, suggesting overconsumption of cigarettes [from Q1 to Q2]. This shows and reveals that the regressive tax is needed in the market. 

However, there are cons to this. One of these is regressive. Those who have low income and are addicted to cigarettes use most of their disposable income on this. It may also lead to an increase in the black market. Consumers may try to evade tax on cigarettes through the black market. This leads to misinformation in the smoking market and causes government revenue to not reach its maximum potential. It also means that Welfare isn’t at its maximum potential due to there being overconsumption through the black market. This can also be seen in the diagram above. 

Regulation of sales

Examples of these are age restrictions and licensing vape retailers. 

The use of age rrestrictions an example of government intervention. By setting an age restriction, those who are below are not able to buy these demerit goods. As a result of this, it causes consumption of this to decrease due to it being a good that has high consumption with many negative externalities. It can help start to internalise the negative externalities as well.

By giving licenses to vape, this also reduces the youth's access to this product as well. This can help reduce the consumption of both vapes and cigarettes. This can be seen to be a good intervention in the long term, as it can lead to many younger adults and teens to use these goods, which can lead to the market of cigarettes and vapes to reach the socially optimal level of consumption. 

Case Study: United Kingdom vs Australia

The UK and Australia have taken very different approaches to regulating vaping. The UK has followed a harm-reduction strategy, encouraging smokers to switch to e-cigarettes. This has coincided with falling smoking rates and rising vaping, with more people now vaping than smoking (ONS, 2024; ASH, 2025). This suggests vaping may act as a substitute, reducing the negative externalities of smoking.

However, youth vaping has also increased, with around 1 in 10 school pupils vaping (NHS England, 2024), raising concerns about nicotine addiction. 

In contrast, Australia has introduced strict regulations, including requiring prescriptions for nicotine vapes. While this aims to reduce consumption, it has led to the growth of a black market, showing how government intervention can create unintended consequences.

Overall, this comparison highlights that while intervention is necessary, overly strict policies may lead to government failure, while looser policies risk increased youth uptake.

Figure 4: Comparison of UK and Australia vaping outcomes

The UK has seen greater reductions in smoking but higher youth vaping, while Australia has lower youth vaping but a larger black market, highlighting the trade-offs of different policies.

Conclusion

Government intervention in the smoking and vaping market is justified due to clear market failures, including negative externalities, asymmetric information and addiction. Without intervention, consumption is higher than the socially optimal level, leading to allocative inefficiency and significant costs to society. Policies such as taxation, regulation and information provision therefore help to reduce these inefficiencies and improve welfare.

However, the extent of intervention must be carefully balanced. Excessive regulation, particularly in the vaping market, can lead to government failure through unintended consequences such as black markets and reduced access to safer alternatives. Evidence suggests that overly strict policies may shift consumption rather than eliminate it.

A more effective approach is targeted intervention. Governments should enforce strict youth access regulations and improve information on relative risks, while maintaining moderate taxation on cigarettes. Vaping should remain available as a harm-reduction tool. Overall, a balanced strategy is most likely to reduce harm while avoiding further market distortions.