This paper analyzes the effects of a ban on smoking in public places upon firms and consumers. Analysis of survey data from public houses finds that the Scottish smoking ban (introduced in March 2006) reduced pub sales and harmed medium run profitability. An event study analysis of the stock market performance of pub-holding companies corroborates the negative effects of the smoking ban on firm performance. We develop a model of public good provision by firms to offer an interpretation of these findings. In the context of smoking, the public good aspect and consumer heterogeneity in preferences regarding smoking appear to be central to the problem. The model allows us to examine the appropriate form of optimal regulation and to study the welfare effect of a smoking ban. The optimal policy response ensures that some pubs be permitted to allow smoking while others are not.
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