New at Reason

Julian Sanchez | August 8, 2005

Jonathan Rauch cheers on a lawsuit aimed at the cartelicious deal between the major tobacco companies and state attorneys general.

Comments

|8.8.05 @ 10:17AM|#

Thanks for the excellent explanation of the Deal, Jonathan!

Opposition to the settlement could put some of us states'-righters in an interestingly weird postion. This may be one instance in which we would want the national government to assert itself more forcefully. Odd. Politics makes strange bedfellows.

|8.8.05 @ 10:28AM|#

"Coming soon to a courtroom near you: Bambi meets Godzilla. This week, the Competitive Enterprise Institute, a free-market advocacy group in Washington, filed suit in federal court..."

LOL! Poor little Bambi...

And what was up with that "normally, the shareholders would pay" paragraph? You people are normally the first to point out that corporations pass on their costs to their consumers, but now you're arguing that Big Tobacco screwed their customers, and saved themselves, by paying the settlement out of taxes at the point of purchase, rather than corporate profits?

|8.8.05 @ 10:43AM|#

fwiw, how much of a tax/fee/settlement/insert-term-here is paid by shareholders (out of profits) vs. by consumers depends on market conditions.

Say that the settlement (or whatever term you prefer) amounted to (hypothetically) $0.25 per pack of cigarettes. (I have no idea if that number is accurate, but it will suffice to illustrate the concept.) If smokers are really loyal to their brands or have a hard time cutting back, then a company can raise the price per pack by $0.25 without significant repercussions. Sure, there will be a drop in demand, which will cut into profits. The lost profits are, in some sense, the company's share of the settlement, and the total amount of extra money paid by consumers is, in some sense, the consumers' share.

However, if consumers are more willing to switch brands or cut back, then a company that only raises prices by, say, $0.15 per pack can scoop up customers from the companies that are raising prices by $0.15 per pack, and make up for the losses per pack by increasing volume.

So, the lesson is that it's tricky to really say who's actually paying for something. If the end result of a situation is a big bite into profits and no significant change in consumer spending then the costs were effectively passed on to shareholders. If the end result is no significant bite into profits but a significant increase in the amount paid by consumers then the costs were effectively passed on to consumers. And if the result is somewhere in between, well, the costs were shared.

Let me be clear that this is not a moral judgement. I've made this point before and somebody jumped all over me, saying that I'm OK with passing on the costs of a law to one group but not another. I'm not endorsing the tobacco settlement (I think the whole thing was ridiculous), and I'm not expressing a preference as to who should bear the burden. I'm simply saying that it's not easy to assert that one group or another is paying for something, because market conditions will dictate how a cost is divided. If anything, there's a good libertarian lesson here: Central planners who claim that the costs of something will fall where they want them to fall are often fooling themselves. The real world is hard to predict. Which suggests that maybe central planners should refrain from imposing costs on people...

|8.8.05 @ 10:46AM|#

I agree, thoreau - not every cost imposed on a corporation will be passed on, 100%, to the customers.

And not every tax on the customers will come off the corporation's bottom line.

The way passed-on costs are often described is far too simplistic.

|8.8.05 @ 10:59AM|#

joe-

Yet, for some reason, whenever I point out that the passing on of costs is a complicated process that depends on particular market conditions, somebody jumps all over me.

So, for the record, first let me say that I oppose policies that impose costs on parties who are voluntarily entering into transactions that (in the absence of regulation) would not affect anybody else. Second, I am not expressing a moral preference for how an unjustly imposed cost should be allocated.

All I'm saying is that anybody, policy-maker or otherwise, who asserts "These costs always go to consumers" or "These costs always hurt profits", is trying to claim more omniscience than he really has.

|8.8.05 @ 11:02AM|#

thoreau,

The reason your such a commie is because you need to take Economics 101. ;-)

|8.8.05 @ 11:07AM|#

The safeguard against "passing costs to the consumer" is competition. In a competitive market, a company can't simply raise prices to recoup its legal losses, or it would lose even more money in lost sales.

The entire point of the MSA, then, was to prevent competition from saving consumers. Instead of the incumbant companies having to take their lumps or face new, non-MSA competition, the MSA hamstrung new entrants to the tobacco business even though the new entrants never signed the MSA. This allowed the big companies to shift the costs to the consumer, something that without the competition-deadening parts of the MSA they couldn't have done.

This isn't a case of the costs of central planning falling in unexpected places. The MSA was designed from the beginning to allow the costs to be shifted to the consumer rather than borne by the signatory companies.

|8.8.05 @ 11:12AM|#

Grant-

Good point. My statement was more about the general case, where some people assert that costs are ALWAYS passed to consumers, or asert (when it's more convenient) that costs ALWAYS come out of profits.

This one was definitely engineered to remove any uncertainty. However, I would be reluctant to predict how costs will be allocated if the agreement is overturned.

MP|8.8.05 @ 11:21AM|#

The MSA was designed from the beginning to allow the costs to be shifted to the consumer rather than borne by the signatory companies.

In light of the joe/thoreau discussion, I think this would be better phrased as...

The MSA was designed from the beginning to allow the costs to be more transparently shifted to the consumer rather than borne directly by the signatory companies and indirectly by the consumer.

|8.8.05 @ 11:35AM|#

Mr. Gould,

One obvious way for the consumers to avoid the cost, and the corporations to eat it themselves, would be for the consumers to stop buying the product.

The confidence with which the you and the cartel ignore this possibility is indicative of the special nature of the nicotine-delivery market.

|8.8.05 @ 1:06PM|#

But Joe, the settlement wasn't supposed to be about reducing the sale of cigarettes.

Big Tobacco was sued for its marketing practices and its obfuscation of the risks of smoking.

This means that, by definition, a new entry into the market cannot possibly be guilty of these acts.

Therefore, imposing the terms of the settlement on new entrants is a savage injustice, and one the states aren't even pretending they aren't undertaking.

Larry A|8.8.05 @ 2:16PM|#

Interesting.

Here Jonathan's hoping that the Supreme Court will shoot down a scheme whereby states blackmail private tobacco manufacturers with the threat of lawsuits alleging that the product is harmful. After all, we're on the side of the consumer, who has to pay the blackmail, and smaller companies that are extorted into going along with the deal.

OTOH yesterday Jacob was hoping Congress wouldn't shoot down a scheme whereby states blackmail private firearm manufacturers with the threat of lawsuits alleging that the product is harmful. Even though we're on the side of the consumer, who will have to pay the blackmail, and small manufacturers, distributors, and retailers who will be extorted into going along with the deal, the attempted agreement with Smith & Wesson fell through so the scheme hasn't succeeded yet.

I think I like Jonathan's take better. "A stitch in time..." and all that.

Besides, even though it's a long shot remedying the tobacco financial agreement by ending the payment of extortion seems a lot more likely than putting gun manufacturers back in business after they've ben bankrupted.