Do Anti-Smoking Activists Know the Restaurant Business Better Than Restaurateurs Do?

I've always been puzzled by claims that smoking bans are good for the bar and restaurant industry. If so, why would the people whose livelihoods are a stake stubbornly continue to permit smoking and resist anti-smoking ordinances? It's implausible that anti-smoking activists would know more about a given business's bottom line than the owner does, let alone that bar and restaurant owners as a class would be systematically blind to their own interests vis-à-vis smoking rules when they pay careful attention to every other variable that affects their profits. Yet anti-smoking activists such as Stanton Glantz insist that the tobacco industry has brainwashed bar and restaurant owners into believing that smoking bans will hurt them, when in fact such laws increase their profitability by reducing personnel costs and attracting more customers. In the latest issue of Econ Journal Watch, David Henderson, an economist at the Naval Postgraduate School in Monterey (and a reason contributor), exposes the weaknesses in this argument, focusing on a 2004 Contemporay Economic Policy article that Glantz, a professor of medicine at the University of California, San Francisco, co-authored with Benjamin Alamar, now a professor of management at Atherton College.

Using a database that includes restaurant sale prices and gross revenues, Alamar and Glantz find that restaurants in jurisdictions with comprehensive smoking bans have higher price-to-revenue ratios than restaurants in other jurisdictions. "There was a median increase of 16%…in the sale price of a restaurant in a jurisdiction with a smoke-free law compared to a comparable restaurant in a community without such a law," they write. "This result indicates that contrary to claims made by opponents of smoke-free laws, these laws are associated with an increase in restaurant profitability." Contrary to Alamar and Glantz's implication, Henderson notes, they did not actually look at changes in restaurant sale prices that followed the adoption of smoking bans—only at differences across jurisdictions. He also points out that higher price-to-revenue ratios could result from lower revenue as well as higher sale prices. Just as important, the study's sample omits restaurants that were not sold, perhaps because they were not profitable enough or even because they went out of business as a result of a smoking ban.

That last point relates to a broader criticism of Glantz's claims about the economic impact of smoking bans. As Henderson points out, a smoking ban is most likely to hurt bars and restaurants that cater to smokers. The owners of these businesses have calculated that they gain more by allowing smoking than they lose, that the smokers (and smokers' friends) attracted by a smoker-friendly policy spend enough money to outweigh the business of potential customers repelled by the smoke. If these owners are right, they will lose money as a result of a smoking ban, while their competitors might make more once competition based on smoking rules is no longer permitted. The customers who valued the opportunity to smoke lose too. Neither kind of loss shows up in gross data on revenues or sale prices.

Henderson notes that Alamar and Glantz claim "externalities" require government intervention in this area but never identify the relevant externalities. Since neither customers nor employees are forced to spend time in bars or restaurants that allow smoking, they can decide for themselves whether they're willing to put up with the smoke. The owners, in turn, suffer any resulting loss of business or increase in personnel costs (because it's harder to find workers, because they demand higher compensation, or, as Alamar and Glantz suggest, because they miss more work days and have higher health care costs as a result of secondhand smoke). Unlike, say, the harm caused by toxins dumped into a river, the costs of secondhand smoke in a bar or restaurant are internalized. In their reply to Henderson, Alamar and Glantz bizarrely insist this is not the case:

It is not possible for a restaurant owner to internalize the cost of second-hand smoke on the health of the staff or the patrons. There is no mechanism by which a restaurant owner can compensate a patron for any health costs related to second-hand smoke, therefore it is not possible for the owner to have completely internalized the costs of the externality imposed by the smoker.

In their original paper, they likewise claim the costs of secondhand smoke exposure in a bar or restaurant cannot be internalized:

Smokers and nonsmokers are not two well-defined groups but are rather numerous individuals with varied tolerances for smoke and willingness to refrain from smoking or to go outside to smoke. Even if the staff of the restaurant is ignored, the number of interested parties is very large with greatly varied preferences in regard to the externality. The large number of interested parties would cause negotiation costs to be high, which violates the assumption of low costs in the Coase theorem.

Henderson deftly exposes the fallacy:

The restaurant owner…no more need get huge numbers of people with varying smoking preferences together to make bargains than he needs to get people together to decide the menu, the lighting, the music, and the air conditioning. In normal discussions of negative externalities, it is costly for the sufferer not only to negotiate but also to exit. It is usually assumed that they are stuck in the "game," and the emphasis is on the cost of negotiation. But in the matter of going to a restaurant, the parties in question can easily decide not to be party at all. They can drive to a different restaurant or eat at home. All the restaurant owner need do is decide on a policy, announce it to the world, and then see what happens.

Although Henderson confines himself to the economics of government-imposed smoking bans, the issues of profitability and externalities both have moral dimensions. Even if restaurateurs know less about their own business than Stanton Glantz does, it's still their business, theirs to fritter away through unprofitable smoking policies if they so choose. And since exposure to secondhand smoke in a bar or restaurant is not forced on anyone, there is no externality to be corrected and therefore no moral justification for the use of force by people who prefer a smoke-free environment.