Market regulation and firm performance: the case of smoking bans in the UK

Jerome Adda, Samuel Berlinski, V Bhaskar and Stephen Machin

No W09/13, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper analyzes the effects of a ban on smoking in public places upon firms and consumers. It presents a theoretical model and tests its predictions using unique data from before and after the introduction of smoking bans in the UK. Cigarette smoke is a public bad, and smokers and non-smokers differ in their valuation of smoke-free amenities. Consumer heterogeneity implies that the market equilibrium may result in too much uniformity, whereas social optimality requires a mix of smoking and non-smoking pubs (which can be operationalized via licensing). If the market equilibrium has almost all pubs permitting smoking (as is the case in the data) then a blanket ban reduces pub sales, profits, and consumer welfare. We collect survey data from public houses and find 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.

Keywords: Regulation; smoking ban; market provision of quality; sales; prices; profitability; stock market performance. (search for similar items in EconPapers)
JEL-codes: H23 I18 L51 L81 (search for similar items in EconPapers)
Date: 2009-07-14
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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