(Case 2, Continued)

Consumption Effect, Ages 35-79
9 2 3

+ WT35-79 x QSC35~79/NS35-79 x] } NSa,s,1 * BS$a,s,1",4
a=1 s=1 1=1

Consumption Effect, Ages 25-34

34 2 3
+ WT25-34 X QSC25-34/NS25-34 * 1, SPMCS-y) ot x L 2 NSarse x BS$az1,s,1',1
y=! fl 1=

B. Life-Year Health Impacts

Participation Effect, Ages 35-79

9 2 3
HY, = WI35-79 x QSP35-79 x UA/(CPD x NS35-79) x] ] ) NSa,s,1 * QWa,s,1,4
a=] s=1 1=1

Participation Effect, Ages 25-34

34 2 3
+ WT25-34 * QSP25-34 x UA/(CPD x NS25-34) x 2, SPMaS-y) ot x L 2.NSa,s,1 * S¥a=1,s,1,4
y= s=l 1=1

Consumption Effect, Ages 35-79

9 2 3
+ WT35-79 * QSC35-79/NS35-79 x L L 2 NSaven2 « BSYa,s,1',4
azl sl 1=

Consumption Effect, Ages 25-34

34 2 3
+ WT25-34 * QSC25-34/NS25-34 * B SPwas-y) 4 x L 2 MSas802 x BSYa=1,5,1',i
y= e=1 1=

5


4.2.1 Fire Loss Data Requirements

‘Two types of fire loss data are required: (1) baseline fire loss
data, and (2) percentage change in smoking-related fires.
The necessary baseline fire loss data consist of projections
over the study period of the annual incidence of death and
injury and the dollar value of property damage caused by
cigarette ignitions in the United States. These data have to
be specified in reference to the annual consumption of
cigarettes, so that the estimated fire loss impacts will reflect
changes in consumption. Convenient units of measurement
are the number of deaths and injuries per billion cigarettes
and the constant dollar value of property damage per billion
cigarettes due to cigarette-related fires. The second type of
fire loss data addresses the expected change in the proba-
bility of ignition due to each cigarette design modification.
These data have to be stated as proportional changes in the
ignition probability. For example, suppose that a particular
modification were estimated to lower the probability of igni-
tion from 80 percent to 20 percent. This would imply a
proportional change of -0.75 {i.e —.60/.80) or a 75 percent
decrease. Of course, if the modification caused changes in
behavior, such as increased carelessness, the proportional
change estimate would have to be adjusted.

4.2.2 Projection of Baseline Annual Cigarette
Consumption

The fire loss data have to be integrated with cigarette

Table 4.6 Equations Used to Compute
Immediate Impacts of the Supply and
Demand Model

ie Tobacco Farming Revenua:

ie = Ede + FPed + EPeatte

2. Tobacco Quote Lease Rate:

EL = C/o )tEPeg = (1 = aL )vb Qe)

3, Tobacco Quote Lease Revenue:
Bm + EL + Re + EQERL
4. Tobacco Producers’ Surplus:

EPS, = uEQe(I + EQe/2)C1 - OL )PeaQe

5. Cigarette Company Revenue Net of Excise Taxes:

We * BedlReg + EFea + YEQcaBea) + (1 ~ BegDCEAce + FFee + Heated

6, Federal Excise Tax Revenue:
ERy * Peg

7. Cigarette Consusera’ Surplus:

FCS, = 1/2 PedQealBRed/ned ~ Beal + Bea]

consumption projections in order to arrive at an assessment
of fire losses per quantity of cigarettes smoked. This subsec.
tion describes the derivation of the cigarette consumption
projections for the years 1986 through 1995 for the resident
U.S. population, ages 16 and over.

In developing the projection model. it was assumed that
the consumption trend of the past ten years would continue
into the next ten years. Hence, the cigarette consumption
figures for the years 1976 to 1985 served as the basis for the
consumption projections for the years 1986 to 1995. The
method described below was used to estimate the future
base-line cigarette consumption:

First, linear regression analysis was used to estimate the
parameters for the intercept and the slope of the trend line
for the years 1976 to 1985. Second, the estimated
parameters were applied to the years 1986 to 1995 to
predict per capita consumption. Third, the per capita figures
were multiplied by the projected population figures for 1986
to 1995 to obtain the total projected cigarette consumption
for those years. These figures are listed in table 4.7.

In the years after 1981 per capita cigarette consumption
showed a marked decrease, presumably attributable for the
most part to the greater than usual number of state excise
tax increases in 1982 and to the rise in the federal excise
tax from 8 cents per pack of cigarettes to 16 cents in
January 1983. Tax increases have been a principal compo-
nent of cigarette price increases,’® and the responsiveness
of cigarette consumption to prices is well documented else-
where in this report.

For the specification of the regression equation a trend
variable YEAR and a DUMMY variable are used. The
dummy variable reflects the tax effects. Since the study
period comprises only 10 years (and the small number of
observations limits the number of explanatory variables that
can be included in the equation), other, more gradual
causes of a change in per capita consumption, such as the
Surgeon General's reports, anti-smoking publicity or demo-
graphic changes, are not specified separately from the trend
variable. Thus, for instance, birth cohort effects are not
assigned a separate variable because it is assumed that the
decrease in per capita cigarette consumption caused by
deaths in the age groups of heavy smokers born between
1910 and 1930 would not have an effect significantly above
trend for a study period of only ten years.

The scenarios ranged from the assumption of a
TEMPORARY change in the intercept or the slope of the
trend line to the assumption of a PERMANENT change in
the intercept and the slope. The dummy variable was coded
as 1 for the years showing a sharp decline in consumption
and as 0 for the remaining years.

The regression equation that resulted in the best fit for the
trend line is based on a permanent change both in the inter-
cept and the slope of the trend line and produced the
following estimates:

*Kenneth E. Warner, The Effects of the Anti-Smoking Campaign on
Cigarette Consumption, American Journal of Public Health (July 1977)
vol. 67, no. 7, pp. 646-650.


Mission and Members

The Technical Study Group on Cigarette and Little Cigar Fire
Safety was established by Public Law 98-567, the Cigarette
Safety Act of 1984, on October 30, 1984. Its mission is to:

“undertake such studies and other activities as it considers
necessary and appropriate to determine the technical and
commercial feasibility, economic impact, and other conse-
quences of developing cigarettes and little cigars that will
have a minimum propensity to ignite upholstered furniture or
mattresses. Such activities include identification of the
different physical characteristics of cigarettes and little cigars
which have an impact on the ignition of upholstered furniture
and mattresses, an analysis of the feasibility of altering any
pertinent characteristics to reduce ignition propensity, and
an analysis of the possible costs and benefits, both to the
industry and the public, associated with any such product
modification.”

Copies of this or any other reports of the Technical Study
Group may be obtained from Mr. Colin B. Church,
Secretariat, Technical Study Group, Consumer Product
Safety Commission, 5401 Westbard Avenue, Washington,
DC., 20207.

MEMBERS:

Richard G. Gann, Ph.D., Chairman
Edward Press, M.D., Vice-Chairman
Charles M. Carey

James L. Charles, Ph.D.

Joseph W. Cullen, Ph.D.

John C. Gerard

James F. Hoebel

Preston H. Leake, Ph.D.

Michael D. McGibeny

Andrew McGuire

Wendy H. Poel

Alan Rodgman, Ph.D.

Alexander W. Spears, Ill, Ph.D.
Henry Tovey

Judith P. Wilkenfeld, Esq

PAST MEMBERS:
Howard Beales, III
Harry |. Cohen

Craig G. Drummond
Max Hausermann, Ph.D.


Table C.1

Modification: Decrease Circumference from 25 to 21 millimeters
Assumptions: Four-year Grace Period, and No Change in Domestic Cigarette Demand
Cost impacts (%): Tobacco Content = --29.40 Paper Cost = - 16.00 Other Cost = ~1.40
Change in Tar and Nicotine (%): 0.0
First-Order Impacts:
Fire Impacts:: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 ie} 0 0 ie) ie} ie} io} ie} ie} ie) ie) 0
1987 ie} 0 ie) 0 0 0 ie} i} ie} 0 ° ie)
1988 i) ie) 0 i} 0 ie) ie} ie} 0 ie} 0 ie)
1989 ie) ie) ie) ie} ie} 0 0 0 ie} ie} i} ie)
1990 353 10833 1614 106 720 22114 3294 217 1088 33395 4975 328
1991 342 10509 1574 105 699 21454 3212 214 1056 32399 4851 323
1992 333 10210 1535 103 679 20843 3134 211 1025 31476 4733 319
1993 323-9901 1494 102 658 20212 3049 208 994 30522 4604 314
1994 315 9662 1460 101 643 19724 2980 205 970 29786 4500 310
1995 305 9369 1415 99 623 19127 2889 202 941 28884 4363 305

PV Sum (0%): 1971 60483 9091 616 4023 123473 18559 1257 6075 186462 28026 1899

PV Sum (5%): 1377 18714 6350 430 2811 38203 12964 877 4245 57693 19577 1324

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb - 0.08 -5.0
Domestic Tobacco Sales Million Lbs -195 ~23.7
Export Tobacco Sales Million Lbs 55 10.0
Total Tobacco Revenue Million $ — 302 14.7
Quota Lease Revenue Million $ -92 ~ 29.8
Producers’ Surplus Million $ —34 NLA.

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 = 1.13 -3.3
Domestic Cigarettes Sales Millions 5348 1.0
Export Cigarettes Sales Millions 815 1.4
Total Cigarette Revenue Million $ ~ 456 -3.0
(Net of Federal Excise Tax)

| Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 43 1.0
Consumers’ Surplus Million $ 605 NA
Health impacts:
Discount Rate Change in Medical Costs Change in Expected Life
(PV 1986 Million $) (PV Years)
0% 2208 ~ 1068777
5% 456 ~ 211320
Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):
2 Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL
Impact: ~ 4887 — 898 — 156 ~ 153 328 142 — 5623

60


Table C.12
Modification:
Assumptions:
Cost Impacts (%):

Paper Cost = 0.00

increase Percentage of Expanded Tobacco from 25 to 50%
immediate Implementation, and a 5.0% increase in Domestic Cigarette Demand
Tobacco Content = ~ 12.73

Other Cost =

~ 0.58

Change in Tar and Nicotine (%): 0.0
First-Order Impacts:
Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 347 10656 1566 96 784 24069 3538 217 1221 37483 5510 339
1987 335 10290 1513 95 757 23243 3417 215 1179 36195 5321 334
1988 325 9969 1468 94 734 22518 3315 212 1142 35067 5163 333
1989 315 9679 1434 93 712 21864 3239 210 1109 34048 5043 328
1990 305 9354 1393 92 688 21128 3147 207 1072 32902 4901 323
1991 296 9074 1359 91 668 20497 3069 205 1040 31920 4780 319
1992 287 «8816 1326 89 649 19914 2994 202 1010 31011 4663 314
1993 279 8549 1290 88 629 19310 2913 199 980 30072 4536 309
1994 272 ©8343 1260 87 614 18844 2847 196 956 29346 4434 306
1995 264 ~=8090 1222 85 595 18274 2760 193 927 28458 4298 300

PV Sum (0%): 3024 92820 13830 910 6831 209661 31240 2056 10637 326502 48650 3202

PV Sum (5%): 2364 32123 10795 707 5339 72560 24383 1596 8315 112997 37971 2485

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.03 -17
Domestic Tobacco Sales Million Lbs ~61 ~-6.7
Export Tobacco Sales Million Lbs 20 34
Total Tobacco Revenue Million $ -97 -43
Quota Lease Revenue Million $ ~36 -10.8
Producers’ Surplus Million $ ~10 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.47 ~14
Domestic Cigarettes Sales Millions 31580 5.4
Export Cigarettes Sales Millions 304 05
Total Cigarette Revenue Million $ 529 3.2
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 253 5.4
Consumers’ Surplus Million $ 1921 NLA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 12804 — 6224985
5 % 3083 — 1428801

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: — 1405 — 3692 ~45 345 840 5126

71



3. Potential Impacts

This section investigates the impacts which might be antici-
pated from reducing cigarette ignition propensity, how those
impacts might be valued, and special issues and uncertain-
ties which arise in attempting measurement. In identifying
types of impact, the perspective taken is that of the U.S.
Congress with concern for all persons, groups, and sectors
affected.

3.1 Sources of Impact

As a Starting point, let us consider why changing the ignition
propensity of cigarettes may have economic impacts.
Knowing why impacts occur will be helpful in determining
what impacts are likely to result from given cigarette design
modifications.

The most obvious and direct source of impact is changing
the probability that a cigarette will cause an unwanted fire.
“he expected results are fewer deaths and injuries from
smoking-related fires, and less property damage.

Another source of impact is changing the kinds or quanti-
ties of raw materials, labor, and production processes
required to produce cigarettes. Even if there were to be no
change in overall production costs, suppliers of raw
materials, labor, and machinery would experience direct
impacts as more is demanded of some factors of production
and less of others.

But changing the mix and quantities of inputs generally
will change production costs, which means a change in the
supply of cigarettes, i.e, a change in the various quantities
of cigarettes which sellers are willing and able to make avail
able for sale at possible alternative prices during a given
period of time, all other things remaining the same. A
change in supply will affect the quantity of cigarettes sold
and the wholesale and retail prices at which they are sold. A
change in cigarette price and sales can be expected to
affect the revenue of cigarette manufacturers, of tobacco
producers, and of other suppliers of raw materials, labor,
and equipment. In turn, consumers, businesses and govern-
ment will likely be affected. And, in addition, secondary
impacts on fire losses due to price-induced changes in ciga-
rette consumption can be anticipated.

193-849 0 - 87 - 2

A further source of impact may be changes in cigarette
attributes other than ignition propensity and price, such as
taste, appearance, tar, nicotine, and carbon monoxide
content, and tendency to stay lit. Changes in these attributes
may change the demand of consumers for cigarettes, i.e.,
the various quantities of cigarettes which buyers are willing
and able to purchase at possible alternative prices during a
given period of time, all other things remaining the same. A
change in demand will affect cigarette sales and prices,
thereby affecting cigarette manufacturers, tobacco
producers, consumers, business, government, suppliers of
raw materials, labor, and machinery, and potential victims of
fire loss. Changes in chemicai potency of cigarettes may
directly affect consumer health.

In brief, impacts may stem from any or all of the following
four sources:

(1) Change in ignition propensity;

(2) Change in the mix or quantities of raw materials, labor,
and/or production processes for manufacturing
cigarettes;

(3) Change in the costs of producing cigarettes; and

(4) Change in the taste, potency, and other smoking
attributes of cigarettes.

A first step in estimating the impacts of a given cigarette
modification is to ask which of these sources of change are
likely to occur.

3.2 Types of Impact

A second step in assessing impact is to decide the level of
coverage. This study focuses on the fire loss impacts, the
primary or “first-order” effects. It also includes secondary or
“second-order” effects which may be important depending
on how the modification is accomplished. Impacts are
grouped into the following categories:

A. First-Order Impacts


Table C.7
Modification:
Assumptions:
Cost Impacts (%):

Increase Percentage of Expanded Tobacco from 25 to 50%
Four-year Grace Period, and No Change in Domestic Cigarette Demand

Tobacco Content = - 12.73 Paper Cost = 0.00 Other Cost = -0.58

Change in Tar and Nicotine (%): 0.0
First-Order Impacts:
Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 ie} 0 0 0 0 0) 0 ie) ie} i} ie) ie}
1987 ie} ie) i} (0) 0 (0) ie) 0 ie} ie} ie) ie}
1988 ie} 0 0 0 0 0) 0 i} ie} 0 0 ie}
1989 ie} 0 0 0 0 i} ie) ie) ie} 0 ie) ie}
1980 359 11023 1642 108 725 22241 3313 218 1090 33459 4984 328
1991 348 10694 1601 107 703 21577 3231 215 1058 32460 4860 324
1992 338 10389 1562 105 683 20962 3152 212 1027 31536 4742 320
1993 328 10075 1520 104 662 20328 3066 209 996 30581 4613 315
1994 320 9832 1485 = 102 646 19837 2997 207 972 29843 4509 311
1995 311 9534 1440 (101 627 19237 2906 203 943 28939 4371 305

PV Sum (0%): 2005 61547 9251 627 4046 124182 18665 1264 6086 186817 28079 1902

PV Sum (5%): 1401 19043 6462 437 2827 38423 13038 882 4253 57802 19614 1327

Second-Order impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb -0.04 -27
Domestic Tobacco Sales Million Lbs -79 ~9.6
Export Tobacco Sales Million Lbs 29 5.4
Total Tobacco Revenue Million $ ~128 ~6.2
Quota Lease Revenue Million $ ~-52 - 16.9
Producers’ Surplus Million $ -13 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.49 -1.5
Domestic Cigarettes Sales Millions 2322 -0.4
Export Cigarettes Sales Millions 436 07
Total Cigarette Revenue Million $ -195 -1.3
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 19 0.4
Consumers’ Surplus. Million $ 262 N.A.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 958 — 463952
5% 198 - 91733

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: - 1749 319 —56 30 147 62 - 1248

66





Table 5.6 Health Data Used in the Health Impact Model: Costs of Smoking

Reductions in Expected Lifetime Medical Care Costs for Increases in Years

the Treatment of Smoking-Related Diseases (1986$) of Life Expectancy

Discounted at 0 Percent Discounted at 5 Percent Discounted at 0 Percent Discounted at 5 Percent
Age/Sex Smoking Level Smoking Level Smoking Level Smoking Level _
Group Light Moderate Heavy Light Moderate Heavy Light Moderate Heavy Light Moderate Heavy
Men
35-39 4,825 8,622 13,419 940 1,680 2,615 3.64 = 5.08 6.21 0.72 0.99 1.22
40-44 4,615 7,984 = 22,233 -1,074 = 1,857 2,846 «3.27 4.60 5.62 0.78 1.07 1.32
45-49 4,240 7,056 = 10,743 1,166 = 1,940 2,954 2.81 4.00 4.90 0.79 1.10 1.35
50-54 3,748 5,944 9,079 1,208 1,916 2,926 2.28 3.32 4.07 0.75 1.07 1.32
55-59 3,118 4,710 7,358 1,163 1,757 2,745 1674 2.60 3.20 0.67 0.97 1.21
60-64 2,471 «3,597 5,869 1,079 1,571 2,564 «1422 2.90 2.36 0.55 0.83 1.03
65-69 1,844 2,643 4,477 922 1,321 «2,238 0.78 1.32 1.65 0.41 0.66 0.83
70-74 1,256 1,811 3,182 720° 1,038 =-:1,824 0.41082 1.06 0.26 © 0.47 0.61
75-79 805 1,188 2,156 526 776 1,408 «0.17 0.49 0.67 0.14 0.32 0.44
Women
35-39 2,150 4,301 8,849 365 730 1,503 «1,65 3.18 4.41 0.31 0.54 0.73
40-44 2,071 4,047 8,290 423 826 1,692 1650 2.94 4.10 0.35 0.60 0.82
45-49 2,095 4,037 3,196 508 979 1,987 1.29 2.64 3.71 0.36 0.64 0.88
50-54 1,917 3,598 7,383 546 1,026 = 2,105 1,052.28 3.25 0.35 0.65 0.91
55-59 1,686 3,064 6,529 574 1,043 2,224 «0475185. 2.69 0.31 0.63 0.89
60-64 1,418 +2, 550 5,748 567 1,020 2,299 0.46 1.40 2.10 0.24 0.56 0.81
65-69 1,111 ~— 2,013 4,707 515 934 2,184 0,190.97 1.52 0.15 0.45 0.69
70-74 828 1,514 3,625 449 821 1,966 = -0.03 0.59 1.01 0.04 0.32 0.52
75-79 553 1,009 2,454 352 642 «1,562 --0.14 0.33 0.63 -0.04 = 0.21 0.38

Note: Suoking levels are defined ae follows: ight smoking, 1-19 cigarettes per day; moderate smoking, 20-39
cigarettes per day; and heavy suoking, 40+ cigarettes per day.

Source: Report from Dr. Gerry Oster to Mr. Colin Church, Estimates of the Economic and Noneconomic Health
Consequences of Smoking, Smoking Cessation, and Reductions in the Amount Smoked, December 12, 1986.
This report was based on earlier work reported in Oster, Colditz, and Kelly, “The Economic Costs of
Smoking and Benefits of Quitting for Individual Smokers," Preventive Medicine, No. 13, 1984,
pp. 377-389 and Oster, Huse, Delea, and Colditz, “Cost-Effectiveness of Nicotine Gum as an Adjunct
to Physician's Advice Against Cigarette Smoking,” Journal of the American Medical Association,
No. 256, 1986, pp. 1315-1318.

The Tobacco Farming Impacts are presented next. These holders of tobacco growing rights (even if the growers and
include the effects of the cigarette modifications on signifi- rights hoiders are the same party). These estimates are
cant economic variables of the tobacco farming sector. For derived using eqs. (1) through (4) of table 4.6.
each economic variable, the units of measurement are given The Cigarette Industry Impacts include similar variables of
along with the absolute change and the percentage change significance to the cigarette industry. First is the wholesale
expected to result. The first variable is the price of U.S. price of cigarettes. This price includes the federal excise tax
produced tobacco. The 1986 price of tobacco was about of $8 per thousand and was $33.75 per thousand in
$1.50 per pound. The next two variables are the quantities December 1985. The next two variables are the quantities of
of U.S tobacco sold in the domestic and export markets. U.S produced cigarettes sold in the domestic and export
Total sales in both markets for 1986 were about 1500 markets. The domestic sales in 1986 were about 583 billion
million pounds. The fourth Tobacco Impact variable is cigarettes, while the export sales were about 65 billion
revenue, which is the product of the price and the total cigarettes. The fourth cigarette impact variable is company
quantity sold. This was about $2.25 billion in 1986. The fifth revenue, which is the product of the price (net of the federal
variable estimates changes in the revenue expected to be excise tax) and the total quantity sold. Revenue was about
earned by the holders of the tobacco growing rights. The $16.7 billion in 1986.
last tobacco sector variable is called producers’ surplus and The fourth impact category includes the federal tax
is a measure of the profits expected to be earned by revenue from the excise tax and an economic measure of
tobacco growers. it is estimated as total tobacco revenue consumer satisfaction called “Consumers’ Surplus.” The
less costs of production less quota lease payments to federal excise tax is levied on cigarettes sald to the

al


Table B. 1 Notation for Health Impact Model

Symbol Definition

HS, Dollar-value health impacts per cigarette “at risk"
per day, for discount rate i.

HY, Life-year health impacts per cigarette “at risk” per
day, for discount rate i.

WT Weight, by age class, reflecting proportion out of
total cigarettes smoked by 25-79 year-olds that are
smoked by that age class.

QsP Quantity share for the participation effect, by age
class.

Qsc Quantity share for the consumption effect, by age
class.

UA Underreporting adjustnent for participation effect

to adjust for fact that smokers smoke more cigarettes
per day than they claim.

CPD Cigarettes per day, an average of average cigarettes
smoked per day by current smokers and recent quitters.

NS25-34, NS35-79
NS25-30, NS31-34 Number of current smokers, by age class.

a Age group number for ages 35-79, where a=l for 35-39,
a=2 for 40-44,..., a=9 for 75-79.

y Age, in years.
s Sex, where s=1 for male and s=2 for female.
1 Smoking level number, where 1=1 for 1-19 cigarettes

per day, 1=2 for 20-39 cigarettes per day, and 1=3
for 40+ cigarettes per day.

NSays L Number of smokers in age group a, sex s, and smoking
>
level 1.

56


Smoking Demographics Data. Smoking demographics
data were computed using raw data compiled in the
National Health Interview Survey conducted in 1985 by the
National Center for Health Statistics. Table 5.7 presents the
data computed for the number of smokers consistent with
the five-year age groups and the three smoking-level cate
gories used in the health data.

Several other values were computed from the Health Inter-
view Survey data for use in the health impact model. They
are as follows:

Total Cigarettes Smoked Per Day, Ages 18-24: 128,128,461

Total Cigarettes Smoked Per Day, Ages 25-34: 274,758,659
Total Cigarettes Smoked Per Day, Ages 35-79: 628,525,665
Total Cigarettes Smoked Per Day, Ages 80+: 8,084,852
Average Cigarettes Smoked Per Day Per

Smoker. 20.87
Average Cigarettes Formerly Smoked Per Day

Per Quitter: 22.95
Average Cigarettes Smoked Per Day, Light

Smokers: 9.50

Average Cigarettes Smoked Per Day.

Moderate Smokers: 23.02
Average Cigarettes Smoked Per Day, Heavy
Smokers: 44.23
Proportion of U.S. Cigarette Consumption

Subject to Health Impacts: ** 0.83

Note that the values listed above for average cigarettes
smoked per day by light. moderate, and heavy smokers
were used as midpoints for developing dose-response
curves.

Data for Step 4, Combining the Quantity Shares and
Weighted Average Health impacts. Participation effect
health impacts were converted to a per cigarette basis by
applying an “underreporting adjustment.” This accounts for
the fact that smokers smoke more cigarettes per day than
they claim, The value used for the underreporting adjust-
ment was 0.67. This value is the ratio of “claimed” versus
“actual” total daily cigarette consumption. Claimed cigarette
consumption for all smokers (ages 12+) was the sum of the

32This value is based on data from the 1983 National Health interview
Survey.

3°This value is the ratio of total cigarette consumption for ages 25-79
versus total cigarette consumption for all ages (ages 12+).

Table 5.1 Definitions, Range, and Values of Parameters Used in the Supply and

Demand Model

Symbol Definition Range Value Used
Ned Wholesale price elasticity of domestic demand for cigarettes 0.2 - 0.5 0.3
Nee Wholesale price elasticity of export demand for cigarettes 1.0 ~ 5.0 3.0
Ted Derived demand elasticity for domestic tobacco 0.5 - 1.5 1.0
‘te Price elasticity of export demand for tobacco 1.0 - 5.0 2.0
attd Cost share of domestic tobacco in cigarettes 0.05 - 0.10 0.07

ox Cost share of paper in cigarettes 0.003 - 0.010 0.005
ap Cost share of Federal excise tax in cigarettes 0.20 - 0.25 0.237
ay Cost share of lease rates in tobacco production 0.10 ~ 0.30 0.15
Boa Quantity share of U.S. cigarettes in domestic market 0.85 - 0.90 0.9
Bea Quantity share of U.S. tobacco in U.S. cigarettes 0.5 - 0.7 0.6
u Elasticity of marginal cost of tobacco 0.1 - 0.4 0.2
€ Agricultural policy response elasticity for tobacco 0.0 -@ 1.0
e Share of modification costs not included in exported cigarettes 0.0 - 1.0 1.0
Source: D. A. Sumner, "The Impact of Cigarette Modifications on the Tobacco Production Industry

in the United States,” Report No. 6, Technical Study Group, Table 3, January 1987.

27


Appendix Cc

Detailed Results of the Impact Analysis

59


Table 5.13 Impacts of Adding Chemical to Tobacco Blend: Summary

Four-Year Grace Period Immediate Implementation
Change in Change in Change in Change in
Impacts Amount Percent Amount Percent
First-Order Impacts
Fire*
Lives saved OR 4,300 75.0 8,500 75.0
Life-years gained 58,000 75.0 115,000 75.0
Injuries avoided 19,700 75.0 38,700 75.0
Property loss avoided (mill.$) 1,300 75.0 2,500 75.0
Second-Order Impacts
Tobacco Farming’
Tobacco price ($/lb.) ie} -01 ie} -0.1
Domestic sales (mill.lbs.) -3 -0.4 -4 -0.4
Tobacco revenue (mill.$) -56 -0.3 ~6 -0.3
Cigarette Industry”
Cigarette price ($/1000) 0.65 19 0.65 19
Domestic sales (mill.cig.) ~3,100 -0.6 ~ 3,400 -0.6
Cigarette revenue (mill.$) 270 1.8 290 1.8
Tax and Consumer’
Fed, Excise Tax Rev. (mill.$) -25 -0.6 ~30 -0.6
Consumer Surplus (mill.$) - 350 380
Health®*
Medical costs (mill.$) ~ 240 - 300 ie)
Life-years (PV yrs.) 135,000 170,000
Employment,
Tobacco Sector (FT equiv.jobs) - 60 -70
Cigarette Sector (FT equiv.jobs) ~ 200 -230 ie}
Other (FT equiv.jobs) -170 - 180

(a) Alll fire impacts (10-year period) and health impacts (lifetime) are given in present values at a 5% discount rate; fire loss
savings assume a 75 percent reduction in the probability of ignition.

(b) Reported for one year only (the first year impact occurs).

consumers are willing to pay for cigarettes and what they
would be required to pay. This result assumes that the
quality of the cigarette is unchanged.

The summary of health effects shows two undesirable
impacts. Increased cigarette consumption is estimated to
raise medical care costs by $450 million in present value
terms, taking into account lifetime medical costs of all
people expected to be affected over the 10-year period
1986 to 1995. Increased disease and illness are estimated
to reduce total life expectancy over 200 thousand years,
taking into account all smokers expected to be affected over
the study period and adjusting for a 5 percent time prefer-
ence. (It should be noted, however, that possible desirable
health effects of decreased levels of tar, nicotine, and CO

37

per puff are not taken into account in these results.)

Negative employment impacts are predicted in both the
tobacco and cigarette sectors due to the large reductions in
tobacco requirements. In the tobacco farm sector, the
equivalent of about 5,000 full-time jobs are estimated to be
lost, about 14 percent of tobacco farming jobs, but a
negligible change in terms of total national employment.
Since many farm workers are employed part time in
tobacco growing, the number of workers affected is likely tc
be larger than 5,000, A small overall gain of 160 full-time
equivalent jobs is forecast in the other sectors, including
retail and wholesale trade and supporting industries, due to
the projected increase in cigarette sales.

The above results are based on the assumption that



Table C.20

Modification: Decrease Paper Porosity from 35 to 10 Coresta Units

Assumptions: Four-year Grace Period, and a 5.0% Decrease in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0,00 Other Cost = 0.00
Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires i 75% Fewer Fire:
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 0) 0 0 ie) 0 0) 0 ie) ie} 0) 0
1987 0 ie} i} ie} ie} ie) ie) ie} 0 0 0 (0)
1988 0 ie} ie} ie) ie) 0 0 ie} (0) (0) 0 0
1989 0 0 ie) 0 0 i?) 0 0 (e) 0) 19) 0
1990 418 12837 1912 126 764 23450 3493 230 1110 34063 5074 334
1991 406 12454 1865 124 741 22750 3407 227 1077 33047 4948 330
1992 394 12099 1819 123 720 22102 3324 224 1046 32105 4828 325
1993 382 11732 1770 121 698 21433 3233 220 1014 31133 4696 320
1994 373 11449 1730 119 681 20916 3160 218 990 30382 4590 316
1995 362 11103 1677 «117 661 20282 3063 214 960 29462 4450 311
PV Sum (0%): 2335 71674 10773 730 4266 130933 19680 1333 6196 190192 28587 1937
PV Sum (5%): 1632 22176 7525 509 2981 40512 = 13747 930 4330 58847 19969 1351

Second-Order impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb -0.02 14
Domestic Tobacco Sales Million Los -27 -33
Export Tobacco Sales Million Lbs 12 22
Total Tobacco Revenue Million $ ~45 -2.2
Quota Lease Revenue Million $ ~22 -7.2
Producers’ Surplus Million $ -4 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.03 -01
Domestic Cigarettes Sales Millions ~ 26495 -5.0
Export Cigarettes Sales Millions 181 0.3
Total Cigarette Revenue Million $ -692 -4.5
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 212 -5.0
Consumers’ Surplus Million $ — 1484 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% ~ 10682 6156246
5% — 2059 1154578

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~§33 ~ 3047 -17 ~ 284 - 1402 -705 - 5989

79




a
Acknowledgements

The authors are grateful to Richard Gann and the other
members of the Technical Study Group and to Colin Church
and members of the Consumer Product Safety Commission
for their useful ideas and suggestions throughout this
research effort. Special gratitude is owed to John Krasny of
the National Bureau of Standards Center for Fire Research
for providing technical background on the cigarette ignition
of mattresses and furniture, to Alexander Spears of Lorillard,
James Charles of Philip Morris, Alan Rodgman of R. J.
Reynolds, and Preston Leake of American Tobacco for
assistance in gathering data on the cigarette manufacturing
process, and to Joseph Cullen and James Callahan of the
National Institutes of Health for advice on health issues. The
authors also appreciate the timely reports and technical
assistance given by the contract consultants to the project:
John Hall (fire loss data), Daniel Sumner (tobacco farming),
Armando Lago (industry cost data), Gary Ford, John Brown,
and John Calfee (consumer issues), Gerry Oster (health),
and David Greenberg (employment).

The authors have also benefited from the many he'pful
comments made by the NBS reviewers of the report: Harold
Marshall, Frederick Johnson, and Kenneth Gordon


Table 5.10 illustration of Impact Analysis Report Presented in Appendix C

Modification: Decrease Circumference from 25 to 21 millimeters
Assumptions: Four-year Grace Period, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = -29.40 Paper Cost = ~ 16.00 Other Cost = - 1.40

Change in Tar and Nicotine (%): 0.0

First-Order impacts:

Fire impacts:: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 ie} is} ie} 0 i) 0) ie) i) 10) ie} ie}
1987 0 ie) ie} 0 ie) i} ie} ie} 0 ie) 0 0)
1988 0) ie} 0) ie} 0 ie) ie} ie} 0 0 0 0
1989 ie) 0 (0) i) Oo ie} 0 0 i?) 0 0 ie}
1990 353 10833 1614 106 720 22114 3294 217 1088 33395 4975 328
1991 342 10509 1574 105 699 21454 3212 214 1056 32399 4851 323
1992 333 10210 1535 103 679 20843 3134 211 1025 31476 4733 319
1993 323 9901 1494 102 658 20212 3049 208 994 30522 4604 314
1994 315 9662 1460 101 643° 19724 2980 205 970 29786 4500 310
1995 305 9369 1415 99 623 19127 2889 202 941 28884 4363 305
PV Sum (0%): 1971 60483 9091 616 4023 123473 18559 1257 6075 186462 28026 1899
PV Sum (5%): 1377 18714 6350 430 2811 38203 12964 877 4245 57693 19577 1324

Second-Order impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb -0.08 -5.0
Domestic Tobacco Sales Million Lbs ~195 -23.7
Export Tobacco Sales. Million Lbs 55 10.0
Total Tobacco Revenue Million $ - 302 -14.7
Quota Lease Revenue Million $ -92 —29.8
Producers’ Surplus Million $ ~34 NA.

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 -1.13 ~3.3
Domestic Cigarettes Sales Milkons 5348 1.0
Export Cigarettes Sales Millions 815 1.4
Total Cigarette Revenue Million $ ~ 456 -3.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Units Absolute Change % Change
Federal Excise Tax Revenue Million $ 43 1.0
Consumers’ Surplus Million $ 605 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 2208 ~ 1068777
5% 456 ~ 211320
Employment impacts by Sector (Change in Full-Time Equivalent Jobs):
2 Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL
Impact: — 4887 ~ 898 ~ 156 —153 328 142 - 5623

34



Table C.6

Modification: Decrease Circumference from 25 to 21 millimeters
Assumptions: Immediate Implementation, and a 5.0% Increase in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = - 29.40 Paper Cost = ~ 16.00 Other Cost = -1.40

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 340 10436 1534. 94 779 23923 3517 216 1219 37410 5499 338
1987 328 10078 1482 93 753 23101 3396 213 1177) 36125 5311 334
1988 318 9764 1438 = 92 729 22381 3295 211 1140 34998 5153 330
1989 309 9480 140491 708 21731 3219 209 1107 33981 5033 327
1990 298 9161 1365 90 684 21000 3128 206 1070 32838 4892 322
1991 290 8888 1331 89 664 20373 3051 203 1038 31858 4770 318
1992 281 8635 1298 = 88 645 19793 2976 =. 201 1008 30951 4654 314
1993 273 8373 1263 86 625 19193 2895, 197 978 30013 4528 309
1994 266 «8171 123485 610 18730 2830 195 954 29289 4425 305
1995 258 7924 1197 84 592 18163 2743 191 925 28402 4290 299
PV Sum (0%): 2962 90909 13546 891 6789 208387 31050 2044 10617 325865 48555 3196
PV Sum (5%): 2315 31462 10572 692 5307 72119 24235 1586 8298 112776 37897 2481

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco SiLb ~ 0.06 -4.2
Domestic Tobacco Sales Million Lbs —192 ~21.3
Export Tobacco Sales Million Lbs 51 8.4
Total Tobacco Revenue Million $ ~ 298 -13.2
Quota Lease Revenue Million $ -85 25.2
Producers’ Surplus Million $ -34 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -1.42 ~3.3
Domestic Cigarettes Sales Millions — 34929 -6.0
Export Cigarettes Sales Millions 752 1.2
Total Cigarette Revenue Million $ 222 1.3
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 279 6.0
Consumers’ Surplus Million $ 2310 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 14162 — 6885151
5% 3409 — 1580327

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~ 4936 2368 — 158 146 1801 929 249

65


Table C.15
Modification:
Assumptions:
Cost Impacts (%):

Change in Tar and Nicotine (%):

0.0

Paper Cost = 48.20

increase Paper Weight from 24 to 32 grams per square meter
Four-year Grace Period, and a 5.0% Increase in Domestic Cigarette Demand
Tobacco Content = 0.00

Other Cost = 0.33

First-Order impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 ie} Oo 0 0 0 0) 0 ie) ie) 0 0 lo)
1987 ie} ie} 0 (0) ie) ie) 0) ie} ie) 0 0 0
1988 0) ie) (e) 0 10) ce) te) ie} ie) 0 0 0
1989 ie} ie} (e) ie) 0) ie) 0 (0) ie} ie} 0 ie)
1990 311 9549 1422 «94 693 21258 3167 208 1074 32967 4911 323
1991 302 9264 1387 92 672 20624 3088 206 1042 31983 4789 319
1992 293 9000 1353 91 653 20036 3013 203 1012 31072 4672 315
1993 284 = 8727 1317 90 633 19429 2931 200 982 30131 4545 310
1994 277 = 8517 1287 89 618 18960 2864 197 958 29404 4442 306
1995 269 8259 1247 87 599 18386 2777 194 929 28514 4307 301
PV Sum (0%): 1737 53315 8013 543 3867 118694 17840 1209 5997 184073 27667 1874
PV Sum (5%) 1214 15496 5598 379 2702 36725 12462 843 419% 56953 19326 1307

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb - 0.02 -141
Domestic Tobacco Sales Million Lbs 27 3.2
Export Tobacco Sales Million Lbs -12 ~2.2
Total Tobacco Revenue Million $ 45 2.2
Quota Lease Revenue Million $ 22 7A
Producers’ Surplus Million $ 4 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.18 05
Domestic Cigarettes Sales Millions 25748 48
Export Cigarettes Sales Millions ~176 -0.3
Total Cigarette Revenue Million $ 763 5.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 206 48
Consumers’ Surplus Million $ 1397 NLA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 10630 — 5145414
5% 2196 ~ 1017359

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 518 3053 7 733 1362 685 6368

74



Technical
Study Group
Cigarette Safety
Act of 1984

Improving the
Fire Safety

of Cigarettes:
An Economic
Impact Analysis

October 1987

ROSALIE T. RUEGG
STEPHEN F. WEBER
BARBARA C. LIPPIATT
SIEGLINDE K. FULLER
Center for

Applied Mathematics
National Bureau

of Standards




quantity share. The result is an estimate of the portion of
total health impacts per cigarette accounted for by the
participation effect.

Consumption Effect. The weighted average health impacts
from the consumption effect are already expressed on a per
cigarette basis. Once scaled down by the consumption
effect quantity share, they represent the portion of total
health impacts per cigarette accounted for by the consump-
tion effect.

The sum of the participation and consumption effect
health impacts, each scaled down by their respective quan-
tity share, represents total instantaneous health impacts per
cigarette.

STEP 5: Include Health Impacts Over the Study Period
The above four steps for evaluating health impacts from
cigarette modifications assigns instantaneous impacts only.
That is, impacts are assigned only for those age groups
having measurable health effects at the time the cigarette
modification is implemented. Over the study period, however,
younger persons will reach ages at which the health risks of
smoking are measured by most databases. To incorporate
these delayed health effects for younger age groups into the
model, Step 2 was modified.

In Step 2, the health data used to value both the participa-
tion and consumption effects for younger ages were limited
to the costs of smoking only. Smoking cost data differ from
quitting benefit data because the health risk of smoking is
not eliminated immediately upon quitting. Since existing
databases do not report substantial health risk from smoking
at these younger ages, quitting benefits for this age group
should be equal in amount to smoking costs. For the partici-
pation effect, then, smoking cost data apply, and for the
consumption effect, smoking cost dose-response curve data
apply.

It is important to note that the length of the study period
sets the age limit for assigning health impacts. Younger age
groups have been found to deliver a much larger price
response than older age groups. Any change in cigarette
prices could, in the long run, have the greatest impact on
the youngest generation. These impacts could be taken into
account by extending the study period.

STEP 6: Modify Model for the Four-Year Lag

To accommodate the requirements of the case studies of
section 5, the model must be modified to assume that the
cigarette modification takes effect in the fourth year of the
study period. Since, over four years, some of the younger
ages will have become subject to the measured health risks
of smoking, they must be assigned instantaneous health
impacts in year four. #4

STEP 7: Modify Model for Alternative Discount Rates
Two changes must be made to incorporate alternative

2*7he approach taken in the four-year lag analysis uses the same
smoking demographics data discussed in Step 3.

22

discount rates. First, the basic health data used must be
based on the desired discount rate. Second, appropriate
single present worth discount factors must be added to the
health impact model to discount health impacts occurring
over the study period.

STEP 8. Modify the Consumption Effect if Consumption
Increases

For increases in cigarette consumption, health impacts due
to the consumption effect should be valued using smoking
cost dose-response curve slopes for increases in consump-
tion levels, as opposed to quitting benefit dose-response
curve slopes for decreases in consumption.

4.3.5 Linkage to the Supply and Demand Model

Once the health impact model is run, its results need to be
linked to the supply and demand model. That is, the health
impact model gives intermediate values that are used in
conjunction with the supply and demand model to estimate
aggregate health impacts. To generate aggregate health
impacts for the entire United States, these intermediate “per
cigarette’ health impacts are applied to the portion of the
modification-induced change in cigarette consumption
subject to health impacts. This change in cigarette consump-
tion is based on three values: (1) total U.S. average daily
cigarette consumption, (2) the modification-induced propor
tional change in U.S. cigarette consumption, and (3) the
proportion of U.S. cigarette consumption subject to health
impacts,

Total U.S. Average Daily Cigarette Consumption. The
annual rates projected for baseline cigarette consumption
over the 10-year study period indicate how cigarette
consumption might change over the next 10 years in the
absence of any modification to the cigarette. An average of
these annual rates of consumption was taken to approximate
the number of cigarettes subject to modification-induced
change per year over the 10-year study period. A 10-year
average was taken for the analysis assuming no lag in
implementing the modification, and an average of the six
years 1990 through 1995 was taken for the 4-year lag
analysis.

Proportional Change in U.S. Cigarette Consumption.
The proportional change in US. cigaretle consumption was
that generated by the supply and demand model for the
cigarette modification case scenario under analysis.

Proportion of U.S. Cigarette Consumption Subject to
Health Impacts. The cigarette modification generates a
change in cigarette consumption, not all of which is subject
to health impacts. The share of total U.S. cigarette consump-
tion smoked by those ages subject to the measured health
risks of smoking over the study period represents the
proportion of consumption subject to health impacts.

The equations for computing aggregate health impacts are
as follows.


Table C.22
Modification:
Assumptions:
Cost Impacts (%):

Decrease Paper Porosity from 35 to 10 Coresta Units
Immediate Implementation, and No Change in Domestic Cigarette Demand
Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 0.00

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 415 12724 1870 115 829 25448 3741 230 1244 38172 5611 345
1987 400 12287 1806 113 801 24574 3613 227 1201 36861 5419 340
1988 388 11904 1753 112 776 23808 3505 225 1163 35712 5258 337
1989 377 11558 1712 «114 753 23116 3424 222 1130 34674 5136 334
1990 364 11169 1664 110 728 22338 3328 219 1092 33508 4992 329
1994 353 10836 1623 108 706 21672 3245 216 1059 32507 4868 325
1992 343 10527 1583 107 686 21054 3166 213 1029 31581 4749 320
1993 333 10208 1840 105 665 20417 3080 210 998 30625 4620 315
1994 325 9962 1505 104 649 19924 3010 208 974 29886 4515 311
1995 315 9660 1459 102 629 19321 2918 204 944 28981 4377 306

PV Sum (0%): 3611 110836 16515 1087 7222 221672 33030 2174 10833 332508 49545 3261

PV Sum (5%): 2823 38358 12890 844 5645 76717 25780 1687 8468 115075 38670 2531

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.00 0.0
Domestic Tobacco Sales Million Lbs 0 0.0
Export Tobacco Sales Million Lbs 0 0.0
Total Tobacco Revenue Million $ 0 0.0
Quota Lease Revenue Million $ ie) 0.0
Producers’ Surplus Million $ ie} NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.00 0.0
Domestic Cigarettes Sales Millions ie} 0.0
Export Cigarettes Sales Millions 0 0.0
Total Cigarette Revenue Million $ 0 0.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 0 0.0
Consumers’ Surplus Million $ 0) NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% i} 0
5% 0 i)

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: i) 0 0 i) 0

0 0

81



Table C.17
Modification:
Assumptions:
Cost Impacts (%):

Change in Tar and Nicotine (%):

Increase Paper Weight from 24 to 32 grams per square meter
Immediate Implementation, and a 5.0% Decrease in Domestic Cigarette Demand

Tobacco Content = 0.00

0.0

Paper Cost = 48.20

Other Cost =

0.33

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 478 14677 2158 133 872 26750 3932 242 1265 38823 5707 351
1987 462 14173 2084 131 842 25832 3798 238 1221 37490 5512 346
1988 447 13731 2022 «130 815 25026 3685 236 1183 36321 5347 343
1989 434 13332 1975 128 792 24299 3599 = 234 1149 35265 5224 339
1990 420 12884 1919 126 765 23481 3498 = 230 1110 34079 5077 334
1991 407 12499 1872 125 742 22781 3411 227 1077 33062 4951 330
1992 396 12143 1826 123 721 22132 3328 = 224 1046 32120 4830 326
1993 384 11775 1776 121 699 21461 3237 221 1015 31147 4699 320
1994 374 11491 1736 120 682 20944 3164 218 990 30396 4592 317
1995 363 11143 1683 117 662 20309 3068 214 960 29475 4452 311

PV Sum (0%): 4165 127851 19050 1254 7592 233015 34720 2285 11018 338179 50390 3316

PV Sum (5%): 3256 44247 14869 973 5934 80642 27099 1774 8612 117038 39329 2574

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $iLb -0.02 -141
Domestic Tobacco Sales Million Lbs -31 ~3.4
Export Tobacco Sales Million Lbs 14 23
Total Tobacco Revenue Million $ -51 -23
Quota Lease Revenue Million $ -25 -74
Producers’ Surplus Million $ -4 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.13 0.4
Domestic Cigarettes Sales Millions ~ 29824 ~54
Export Cigarettes Sales Millions 204 0.3
Total Cigarette Revenue Million $ -692 -44
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~ 239 -5.1
Consumers’ Surplus Million $ -1714 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) {PV Years)
0% — 12002 6914895
5% ~ 2678 1497284

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: — 600 —3330 ~19 180 ~ 1578 ~793 —6141

76





(24)

(25)

{26}

{27]

US. Department of Commerce. Bureau of the Census.
Current Population Reports, Series P-25, Nos. 917, 952,
985.

U.S. Department of Commerce. Bureau of Industrial
Economics. 1985 Industrial Outlook. Sec. 43, “Tobacco”
US. Department of Health and Human Services.

Public Health Service. National Center for Health
Statistics. Provisional Data from the Health Promotion
and Disease Prevention Supplement to the National
Heaith Interview Survey: United States, January-March
1985. Hyattsville, MD, November 1985.

U.S. Department of Health and Human Services. Office
of the Surgeon General. "Remarks by C. Everett Koop,
M.D., Surgeon General, at Press Conference Releasing
the 1986 Surgeon Generals Report on The Health
Consequences of Involuntary Smoking’ Press Release,
December 16, 1986.

46

[28]

{29]

[30]

[31]

US. Department of Health and Human Services. Office
of the Surgeon General. The Surgeon General's
Reports, 1982, 1983, 1984, 1986.

Warner, Kenneth, E. “Consumption Impacts of a
Change in the Federal Excise Tax’ The Cigarette
Excise Tax: April 17, 1985. Smoking Behavior and
Policy Conference Series. Cambridge, MA: Harvard
University, Institute for the Study of Smoking Behavior
and Policy, 1985, pp. 88-105.

Warner, Kenneth E. ‘The Effects of the Anti-Smoking
Campaign or Cigarette Consumption” American
Journal of Public Health, vol. 67, no. 7, July 1977, pp.
646-650.

Weinstein, Milton C. and Stasson, William B. “Founda
tions of Cost-Effectiveness Analysis for Health and
Medical Practices” The New England Journal of Medi-
cine, March 31, 1977.


Table C. 29

Modification: Add Chemical to Tobacco Blend
Assumptions: Immediate Implementation, and a 5.0 % Decrease in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 2.83

Change in Tar and Nicotine (%): 0.0

First-Order impacts:

Fire tmpacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 484 14846 2182 134 875 26862 3949 243 1267 38879 5715 351
1987 467 14336 2108 132 845 25940 3814 239 1223 37544 5519 347
1988 452 13889 2045 131 819 25131 3700 237 1185 36373 5355 343
1989 439 13485 1997 130 795 24401 3614 235 1151 35316 5231 340
1990 425 13032 1941 128 768 23580 3513 231 1112 34128 5084 335
1991 412 12643 1893 126 745 22876 3425 228 1079 33110 4958 331
1992 400 12282 1847 124 724 22224 3342 225 1048 32167 4837 326
1993 388 11910 1797 122 702 21551 3251 222 1016 31192 4705 321
1994 379 11623 1756 «121 685 21031 3177 219 992 30440 4599 317
1995 367 11271 1702 119 664 20395 3080 215 962 29518 4458 311
PV Sum (0%): 4213 129317 19269 1268 7623 233992 34866 2295 11034 338668 50463 3321
Pv Sum (5%): 3293 44754 15039 984 5959 80981 27213 1781 8624 117207 39386 2578

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco SiLb 0.02 ~1.2
Domestic Tobacco Sales Million Lbs ~34 -3.7
Export Tobacco Sales Million Lbs 15 25
Total Tobacco Revenue Million $ -56 -25
Quota Lease Revenue Million $ —27 -8.0
Producers’ Surplus Million $ -5 N.A,

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.63 19
Domestic Cigarettes Sales Millions — 32394 -5.6
Export Cigarettes Sales Millions 221 03
Total Cigarette Revenue Million $ ~ 485 29
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ — 259 ~56
Consumers’ Surplus Million $ - 1995 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% — 13036 7510729
5% - 2909 1626300

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~652 - 3561 -2i — 223 ~1714 ~ 861 ~ 7032

88


Table C.8
Modification:
Assumptions:
Cost Impacts (%):
Change in Tar and Nicotine (%):

Increase Percentage of Expanded Tobacco from 25 to 50%

Tobacco Content = ~12.73

0.0

Paper Cost = 0.00 Other Cost =

Four-year Grace Period, and a 5.0% Decrease in Domestic Cigarette Demand
~ 0.58

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 i) 0 ie) 0) 0 0) 0 ie) QO ie} ie}
1987 ie} ie} 0 ie) i} Oo 0 0 ie} 0 0 ie)
1988 ie} 0) (e) te) 0 ie) 0 ie) 0 ie) 0) 0
1989 0 0 (0) ie) i?) 0 0 ie) ie) 0 0 ie)
1990 414 12692 1891 124 761 23354 3479 229 1108 34015 5067 334
1991 401 12314 1844 123 738 22657 3393 226 1075 33000 4941 330
1992 390 11963 1799 121 TAT) 22011 3310 223 1045 32060 4821 325
1993 378 11601 1750 119 695 21345 3220 220 1013 31089 4690 320
1994 369 11321 1710 118 679 20830 3147 217 988 30339 4583 316
1995 358 10978 1658 116 658 20199 3051 213 959 29420 4444 310

PV Sum (0%): 2309 70868 10652 722 4248 130396 19599 1328 6188 189924 28546 1934

PV Sum (5%): 1613 21927 7441 503 2969 40345 13691 926 4324 58764 19941 1349

Second-Order impacts:

Tobacco Farming Impacts: Units. Absolute Change % Change
Price of Tobacco S/Lb ~ 0.05 -3.6
Domestic Tobacco Sales Million Lbs — 103 ~ 12.6
Export Tobacco Sales Million Lbs 40 7.3
Total Tobacco Revenue Million $ — 166 -641
Quota Lease Revenue Million $ -70 22.8
Producers’ Surplus Million $ -16 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.51 -1.5
Domestic Cigarettes Sales Millions — 24203 -45
Export Cigarettes Sales Millions 594 1.0
Total Cigarette Revenue Million $ - 873 -57
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ — 194 -45
Consumers’ Surplus Million $ — 1232 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% -9758 5623657
5% - 1881 1054693

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: — 2216 — 2734 -71 ~ 255 — 1258 — 644 -7A77

67



Table 5.2 Percentage Changes in
Tobacco Content, Paper Costs, and
Other Costs for Selected Cigarette
Modifications.

Percent Change

Tobacco Paper Other
Content Costs Costs

Cigarette
Modification

Decrease Circumference

from 25 to 21 mm -29.4 -160 +140
Increase Percentage of

Expanded Tobacco 12.73 0 —0.58
Increase Paper Weight

from 24 to 32 g/m? 0 48.2 03
Decrease Paper Porosity?

from 35 to 10 Coresta 0 0 0
Add Chemical to

Tobacco Blend (0) ie) 2.83

(1) Data based on informal discussions with Dr. C. M. Kauf
man, Ecusta Corporation, Pisgah Forest, NC, July 1987.

SOURCE: A. M. Lago and J. A. Shannon, “Cost Analysis of
Options for Self-Extinguishing Cigarettes,” Report
No. 6.

total cigarette consumption figures listed above for ages
18+ and an estimate of total cigarette consumption by 12-
17 year-olds of 52,328,767 cigarettes per day.** Actual ciga
rette consumption was the daily equivalent of the 1985 total
cigarette consumption figure [1,625,041,100 (= 593.14

bill 865)] from The Maxwell Report listed in table 4.7.

Data from the Health Impact Model. The health impact
model described in section 4.3 was run using the above
data. Table 5.8 presents the results.

5.1.5 Employment Data

All three categories of the employment data used in the
impact analyses are presented in table 5.9. The baseline
employment levels and the direct employment effects for
each of the six sectors are given in terms of full-time equiva:

a¢Kenneth E. Warner, “Consumption Impacts of a Change in the Federal
Excise Tax,” The Cigarette Excise Tax: April 17, 1985, Smoking Be-
navior and Policy Conference Series, Institute for the Study of Smok-
ing Behavior and Policy, Harvard University (April 17, 1985) p. 95

lent jobs. The direct effect on the cigarette manufacturing
sector for the circumference modification is the product of
the proportional change in the tobacco content per cigarette
times the number of jobs directly associated with tobacco
handling and preparation in the cigarette manufacturing
plants (i.e., 6000 full-time equivalent jobs). The elasticities of
employment with respect to levels of production are
presented at the bottom of the table, along with the propor.
tional change variable from the supply and demand model
that is applicable to each elasticity. These data are drawn
from the supporting study on employment data.**

5.2 Format of the Impact Analysis Reports

An example of the impact analysis reports is given in table
5.10. The report consists of a single page that contains a
description of the modification, a statement of the assump-
tions of the case, and detailed numerical estimates of the
changes in the most significant variables expected to be
affected by the modification. These variables and their
corresponding estimated changes are grouped into six
major impact categories, the first being principal, or first-
order, impacts and the remaining five secondary, or second-
order impacts:

(1) Fire Damage Impacts,

(2) Tobacco Farming Impacts;
(3) Cigarette Industry Impacts;
(4) Tax & Consumer Impacts;
(5) Health Impacts; and

(6) Employment Impacts.

Note that second-order fire damage impacts are also esti-
mated, but these are small and are combined with the first-
order fire damage impacts. The first-order impacts are those
that would result from the reduced ignition propensity. The
second-order effects (positive or negative) are those that
may arise from the changed level of cigarette consumption
because of shifts in supply (production costs) and demand
(taste). For each of the ten years of the study period, the
impacts on three types of fire losses are reported: fire
deaths, fire injuries, and property damage from fires. The
impact on fire deaths is stated in two ways: the number of
lives saved (deaths averted) and the number of years of life
expectancy gained. These two ways of stating the fire death
impacts should be viewed as alternatives to a single benefit
that should not be double counted. Each set of impacts are
computed for three alternative assumptions regarding the

38David Greenberg, ‘The Employment Implications of Proposed Ciga-
rette Design Modifications to Reduce Cigarette Ignition Propensity,”
Report No. 6, Technical Study Group


5.3.3 Chemical Additive to Tobacco Blend

Table 5.2 shows an increase in “other costs’ of 2.83 percent
due to adding chemical to the tobacco blend. No other cost
changes are indicated. This amounts to an increase in total
production costs of about 2 percent

Table 5.13 summarizes results for this modification. (See
appendix tables C.13 through C.18 for more detailed
results.) The positive impacts on fire losses are estimated at
essentially the same amounts as for the previous two modifi-
cations, because the same percentage change in ignition
propensity is assumed. In contrast to the previous two
modifications, this one is estimated to have positive health
impacts. Health impacts are estimated to be positive as a
result of the secondary effect of higher production costs to
reduce cigarette consumption. (Possible adverse health
elfects associated directly with the chemical additive are not
taken into account.) Due to the inelasticity of the demand for
cigareties, manufacturers’ revenue is estimated to rise
slightly due to the higher price of cigarettes, even though
saies are estimated to be somewhat lower. Tobacco farmers
are expected to be affected only slightly, ignoring possible
adverse effects on cigarette demand

5.3.4 Increased Paper Weight

Table 5.2 reports that the increase in paper weight from 24
to 32 grams per square meter is expected to increase
paper costs by an estimated 48.2 percent and other costs
by 0.3 percent. While this is a sizable increase in paper
costs, it amounts to about a 1 percent increase in total ciga-
rette costs.

Table 5.14 summarizes the estimates of economic impact.
(See appendix tables C.19 through C.24 for more detailed
results.) As in the preceding cases, fire loss impacts are
based on a 75 percent reduction in ignition propensity, and
therefore, the amounts are about the same as before. Like
the chemical additive, this modification is estimated to have
positive health impacts due to a price-induced reduction in
cigarette consumption. (However, possible negative health
consequences associated with heavier paper are not taken
into account.) Also like the chemical additive, this modifica-
tion is expected to entail negligible change in tobacco
content, and hence negligible impact on the farm sector,
ignoring possible adverse effects on cigarette demand.
impacts on the cigarette industry, federal excise tax
revenue, consumer satisfaction, and employment impacts
are also estimated to be quite small, because the cost
change is relatively small.

5.3.5 Decreased Paper Porosity

A decrease in paper porosity from 35 to 10 Coresta is esti-
mated to entail an insignificant change in the overall price of
cigarette paper, since minor positive and negative changes
in manufacturing and material costs would largely offset
each other. The analysis therefore assumes no change in
paper costs and no change in tobacco or other manufac-

40

turing costs for this modification

Table 5.15 summarizes the estimates of economic impact
(See appendix tables C.25 through C.30 for more detailed
results.) As in the preceding cases, the change in fire igni-
tion propensity is shown for a 75 percent reduction,
resulting in fire loss savings comparable to those shown in
the other summary tables. There are no measurable impacts
other than fire impacts due to the decrease in paper
porosity, ignoring possible changes in cigarette demand

5.4 Sensitivity of Results to Key
Assumptions

The results presented in section 5.3 are based on a
complex set of data and assumptions which may be consid-
ered “best guess” values, in the sense that care was taken
to select from available values those that appeared to be
most appropriate. However, it is important to note that there
are considerable uncertainties associated with many of the
values, and that different results would be obtained with the
use of different values. The purpose of this section is to
examine the sensitivity of results to alternative values of data
and assumptions in order to test their impact on outcome.
The sensitivity analysis focuses on the following five areas.
(1) Time required for implementation of the design modifi-
Cation,

(2) Length of the study period;
(3) Value of the discount rate;
(4) Shifts in demand for cigarettes; and

(5) Change in the tar, nicotine, and carbon monoxide
content of cigarettes.

5.4.1 Time Required (Grace Period) for Implementing
the Design Modification

A delay in implementing a public policy is often allowed to
facilitate the necessary transition. The typical advantage of a
delay is easier (lower cost) compliance, and the disadvan-
tage, a delay in obtaining the desired effect.

The purpose of this discussion is to compare the esti-
mated impacts associated with two alternative implementa
tion requirements:

(1) A four-year delay, and
(2) No delay.

While the cost data collected in the supporting study of
industry cost data showed no significant difference between
costs with and without the delay, this was predicated on the
hypothesis that each modification could be done within the
specified time. It was pointed out in the supporting study
that in the case of several of the design modifications,


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4]

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[10]

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Ford, Gary T., Brown, John P, and Calfee, John E.
“The Costs and Benefits to Smokers of Reduced Flam-
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Report No. 6. Technical Study Group. Cigarette Safety
Act of 1984, 1987.

Garner, Donald W. “Product Liability in Cigarette-
caused Fires” New York State Journal of Medicine. July
1985, p. 322.

Greenberg, David. ‘The Employment implications of
Proposed Cigarette Design Modifications to Reduce
Cigarette Ignition Propensity” Economic Sector Data for
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Report No. 6. Technical Study Group, Cigarette Safety
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Hall, John R., Jr Expected Changes in Fire Damages
from Reducing Cigarette Ignition Propensity. Report
No. §. Technical Study Group. Cigarette Safety Act of
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Hartunian, N.S.; Smart, C.N.; and Thompson, M.S ‘The
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notably increased use of expanded tobacco and increased
paper weight, the assumption of immediate implementation
appears technically infeasible, due to the lack of necessary
industrial capacity. The results based on immediate
implementation for those cases should therefore be
regarded only as a reference point.

in the case of fire-loss savings, delayed implementation
means smaller total fire-loss savings over time as potential
savings during the period of delay are foregone. The higher
the time preference (as indicated by the value of the
discount rate), the larger the estimated loss in benefits due
to the time delay. The estimated effect of a four-year delay
on fire-loss impacts may be seen by comparing impacts
shown in the first two columns (delayed implementation) of
tables 5.11 through 5.15 with those shown in the second
two columns (immediate implementation). With the 5 percent
discount rate used in computing those results, a delay of 4
years cuts estimated present value fire-loss impacts for
1986-1995 almost in half. Without discounting (0 discount
rate as shown in tables C.1 - C.30), a four-year delay
reduces these impacts by about 45 percent.

A four-year delay in implementation is shown to have a
much smaller effect on estimated health impacts than on
fire-loss impacts. With the 5 percent discount rate used in
computing the results shown in tables 5.11 through 5.15, a
delay of four years reduces health impacts (positive or
negative) by roughly 25 percent. The smaller effect reflects
the way health impacts are measured. They are measured
as the modification-induced change in lifetime medical costs
and in life expectancy of all people who are estimated to be
affected within the 10-year study period. The modification-
induced change is assumed to be a one-time event,
brought about by a one-time change in smoking, rather than
a recurring effect. The main effect of the implementation
delay is, therefore, to lag the time until the change occurs; it
has little effect on the absolute size of the change.

Delaying implementation is estimated to reduce farming
impacts, cigarette industry impacts, and tax and consumer
impacts. Because these are estimated as annual impacts,
delaying implementation for four years will mean foregoing
these impacts for four years.

5.4.2 Length of the Study Period

At the beginning of this study, it was hypothesized that the
smoking-related fire problem might be declining rapidly over
time due to declines in smoking and increases in the use of
fire-resistant materials and fire mitigation technologies. It was
hypothesized that a study period as long as 10 years might
capture most of the fire-loss savings, and a 10-year study
period was adopted for assessing fire-loss impacts.

The results of the impact analysis appear to be more
sensitive to the length of the study period than was
expected. Estimated annual fire-loss savings are projected
to decline at a rate of only several percentage points each
year.

In the case ot lives saved, for example, the rate of decline
results in approximately a 25 percent decline between 1986
and 1995. This means that significant fire-loss savings could

4

be expected past the 10-year study period, and suggests
that the present value estimates of these effects taken over
10 years are understatements of the total long-run fire-loss
impacts. In the case of health impacts, the results appear
relatively insensitive to the length of the study period This is
because the health effects are induced by a one-time
change, but measured as life-time amounts. People aged 35
and over at the time the modification occurs, who change
their behavior as a consequence, are assumed to be
affected. People under the age of 35 are assumed to be
affected by the change only if they reach the age of 35
within the designated 10-year study period. (This assumption
is made because the health data base used in the study
assigns health costs only to smokers aged 35 and over.) A
10-year study period means that health effects will be
attributed to people down to the age of 25 (since they reach
the age of 35 within the study period and incur health
effects in the year they become 35). Extending the study
period would include additional people below the age of 25,
and, therefore, increase health impacts. Because the price
elasticity of demand for 12- to 24-year-olds is larger than
that for 25- to 79-year-olds, the change in cigarette
consumption for 12- to 24-year-olds during their younger
years is likely to be higher. However, since health impacts
associated with changed cigarette consumption occur at a
later date, discounting would reduce their significance.
Therefore, a 10-year study period is probably sufficiently
long to capture most of the health impacts.

Farming, cigarette industry, and tax and consumer
impacts are expected to recur, at least in the short run. In
the long run, there may be some decline in farming and
cigarette industry impacts as unemployed resources are
deployed to other uses. It should be noted that these
impacts are shown in the tables for one year only, not over
a 10-year study period.

5.4.3 Value of the Discount Rate

Impact estimates tend to be sensitive to the value of the
discount rate because it lowers the relative weight of future
values. The higher the discount rate, the lower the present
value equivalent of a future amount, and vice versa. Thus,
the higher the discount rate, the lower the present value of
future fire-loss and lifetime health impacts.

The sensitivity of the results to the discount rate can be
seen in appendix C tables by comparing the analysis results
based on a 5 percent discount rate with those based on a 0
percent discount rate (the latter being the equivalent of no
discounting) for fire-loss impacts and health impacts. Table
C.1 shows present value fire-loss impacts to be about 30
percent lower based on a 5 percent discount rate than on a
0 percent rate. Table C.1 shows present value health
impacts to be nearly 80 percent lower based on a 5 percent
discount rate than on a 0 percent rate. Health impacts are
more sensitive to the discount rate than are fire-loss impacts
because the discount rate is used in developing the data
base of lifetime health effects associated with smoking, as
well as in computing the present value of health effects
distributed over the 10-year study period.


Table C.11

Modification:
Assumptions:
Cost Impacts (%):
Change in Tar and Nicotine (%):

Increase Percentage of Expanded Tobacco from 25 to 50%

Tobacco Content = - 12.73

0.0

Paper Cost = 0.00

Immediate Implementation, and a 5.0% Decrease in Domestic Cigarette Demand
Other Cost = -0.58

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss _lives Years Injured Loss
1986 471 14459 2126 131 867 26605 3911 240 1262 38751 5696 350
1987 455 13963 2053 129 837 25691 3777 237 1219 37420 5501 345
1988 441 13527 1992 128 811 24890 3665, 235 1181 36253 5337 342
1989 428 13134 1946 126 787 24167 3580 233 1147 35199 5214 339
1990 414 12692 1891 124 761 23354 3479 229 1108 34015 5067 334
1991 401 12314 1844 123 738° 22657 3393 226 1075 33000 4941 330
1992 390 11963 1799 121 717 22011 3310 223 1045 32060 4821 325
1993 378 11601 1750 119 695 21345 3220 220 1013 31089 4690 320
1994 369 (11321 1710 118 679 20830 3147 217 988 30339 4583 316
1995 358 10978 1258 116 658 20199 3051 213 959 29420 4444 310

PV Sum (0%): 4103 125952 18767 1235 7550 231749 34531 92273 10997 337546 50295 3310

PV Sum (5%): 3207 43590 14648 959 5902 80204 26952 1764 8596 116819 39256 2570

Second-Order Impacts:

Tobacco Farming impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.05 -3.6
Domestic Tobacco Sales Million Lbs -113 ~12.6
Export Tobacco Sales Million Lbs 44 7.3
Total Tobacco Revenue Million $ ~ 182 -84
Quota Lease Revenue Million $ -77 ~22.8
Producers’ Surplus Million $ -17 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.51 -15
Domestic Cigarettes Sales Millions — 26497 -4.5
Export Cigarettes Sales Millions 650 1.0
Total Cigarette Revenue Million $ -955 -57
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~ 212 -45
Consumers’ Surplus Million $ - 1348 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% ~ 10663 6143322
5% — 2379 1330215

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~ 2426 — 2993 -78 ~279 - 1377 — 705 ~ 7858

70



Table C.21
Modification:
Assumptions:
Cost Impacts (%):

Decrease Paper Porosity from 35 to 10 Coresta Units
Four-year Grace Period, and a 5.0% Increase in Domestic Cigarette Demand

Tobacco Content = 0.00

Change in Tar and Nicotine (%): 0.0

Paper Cost = 0.00

Other Cost = 0.00

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 ie) 0 10) 0) ie) 0 0 0 0) (0) (0) (0)
1987 0 ie} 0 0 ie) ie} ie} 0 0 ie} 0 ie)
1988 0 ie} 0 ie} 0 ie) ie} ie} ie} ie} ie} 0
1989 ie} ie} ie) 0 ie) ie) ie} ie} ie} ie} 0) 0
1990 310 9502 1415 93 692 21227 3162 208 1074 32952 4909 323
1991 300 9218 1380 92 671 20593 3084 206 1042 31968 4787 319
1992 292 ©8955 1347 91 652 20006 3008 203 1012 31058 4670 315
1993 283 8684 1310 89 632 19401 2927 200 981 30117 4543 310
1994 276 «8475 1280 88 617 18932 2860 197 958 29390 4440 306
1995 268 | 8218 1241 87 598 18359 2773 194 929 28500 4305 300

PV Sum (0%): 1728 53052 7974 540 3861 118519 17814 1207 5994 183985 27654 1873

PV Sum (5%): 1208 16415 5570 377 2698 36670 12444 842 4189 56926 19317 1307

Second-Order impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.02 -44
Domestic Tobacco Sales Million Lbs -27 ~3.3
Export Tobacco Sales Million Lbs -12 -2.2
Total Tobacco Revenue Million $ 46 2.2
Quota Lease Revenue Million $ 23 7.3
Producers Surplus Million $ 4 NLA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 —0.03 -04
Domestic Cigarettes Sales Millions — 26495 -5.0
Export Cigarettes Sales Millions -181 -0.3
Total Cigarette Revenue Million $ 694 46
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 212 5.0
Consumers’ Surplus Million $ 1483 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 10939 ~ 5294823
5% 2260 — 1046900

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 533 3047 17 284 1402 705 5989

80



Table 5.11 Impacts of Decreasing Cigarette Circumference from

25 to 21 Millimeters: Summary

Four-Year Grace Period Immediate Implementation
Change in Change in Change in Change in
Impacts Amount Percent Amount Percent
First-Order Impacts
Fire*
Lives saved OR 4,200 75.0 8,400 75.0
Life-years gained 57,700 75.0 115,000 75.0
Injuries avoided 19,600 75.0 38,500 75.0
Property loss avoided (mill.$) 1,300 75.0 2,500 75.0
Second-Order Impacts
Tobacco Farming”
Tobacco price ($/lb.) ~0.08 ~5.0 ~0.08 -5.0
Domestic sales (mill.Ibs.) - 190 = 23.7 —210 -23.7
Tobacco revenue (mill.$) ~300 -14,7 ~ 330 14.7
Cigarette Industry”
Cigarette price ($/1000) -1.13 -3.3 -1.13 -3.3
Domestic sales (mill.cig.) 5,300 1.0 5,900 1.0
Cigarette revenue (mill.$) -460 -3.0 -- 500 -3.0
Tax and Consumer?
Fed. Excise Tax Rev. (mill.$) 45 1.0 50 1.0
Consumer Surplus (mill.$) 600 660
Health*
Medical costs (mill.$) 450 570 1.0
Life-years (PV yrs.) - 211,000 — 265,000
Employment,
Tobacco Sector (FT equiv.jobs) ~ 4,900 -§,300
Cigarette Sector (FT equiv.jobs) ~ 900 — 980 -40
Other (FT equiv.jobs) 160 180

(a) All fire impacts (10-year period) and health impacts (lifetime) are given in present values at a 5% discount rate; fire loss
savings assume a 75 percent reduction in the probability of ignition.

(b) Reported for one year only (the first year impact occurs)

are given assuming a four-year delay prior to implementa
tion. In the second two columns, results are given assuming
immediate implementation. First the estimated amount of
impact is given, and then the percentage change.

Looking first at the section on fire loss impacts, we can
see from the first column the estimated positive effects,
discounted at an annual compound rate of 5 percent. If this
design modification made cigarettes 75 percent less likely to
cause fires, an estimated 4,200 lives would be saved over
the study period from 1986 to 1995. This number of saved
lives is estimated to be equivalent to a gain in total life
expectancy of 57,700 years, taking into account the ages of
fire victims and current life expectancy at different ages.

35

Injuries avoided are projected to total 19,600 over the study
period. Present value property loss avoided over the 10-
year period is estimated at $1.3 billion.

Looking next at tobacco farming impacts, we can see
from the first two columns that the decrease in cigarette
circumference is expected to have a negative effect on this
sector. The design modification is predicted to cause
tobacco price to fall 5 percent, which is a decrease of $0.08
per pound of leaf tobacco, assuming an average pre-
modification price of $1.50 per pound. Price is estimated to
fall because of the reduced demand for tobacco resuiting
from lower tobacco content per cigarette. Even though the
lower price of cigarettes is expected to increase cigarette



Technical

Study Group
Cigarette Safety
Act of 1984

Improving the
Fire Safety

of Cigarettes:
An Economic
Impact Analysis

October 1987

ROSALIE T. RUEGG
STEPHEN F. WEBER
BARBARA C. LIPPIATT
SIEGLINDE K. FULLER

Center for
Fire Research
Applied Mathematics






Percapcon = 373188 -
31.92(YEAR) + 281.79(DUMMY) ~ 55.98(YEAR(DUMMY)
(-3.61) (2.20) (-2.99)

wnere Percapcon stands for per capita cigarette consump-
tion. The standard error for this estimation was +3695 with
an R? of .70, The t-statistic (in parentheses) was significant.
with 6 degrees of freedom, at a 90% confidence .nterval for
the intercept parameter and at a 95% confidence interval for
the remaining parameters.

the scenario underlying this equation assumes that over
the next ten years the trend in cigarette consumption will
continue to follow the pattern established in 1982. This
imphes that in the coming decade per capita cigarette
consumption will further decline if factors contributing to this
trend remain the same over the next ten years, factors such
as cigarette pricing, attitudes toward smoking, anti-smoking
laws, and cohort effects.1®

The estimates arrived at by this method and shown in
table 4.7 indicate a 276 percent decrease in per capita ciga-
rette consumption, i.e. from 3,241.04 (162 packs) in 1985 to
2,343.57 (117.2 packs) in 1995. When the estimated per
capita figures are multiplied by the population projections for
the years 1985 to 1995, the results show an estimated
decrease in total cigarette consumption of 21.6 percent, i.e.
from 593.14 billion in 1985 to 465.58 billion cigarettes in
1995. Both the per capita and the total consumption reduc-
tions are in line with the projections discussed in Tobacco
Situation and US. Industrial Outlook 1985, with the former
predicting a per capita decline of 10 to 25 percent by
199017 and the latter predicting a possible decrease in tota!
consumption of as much as 2 to 3 percent annually.1®

4.2.3. Fire Loss impact Model and Linkage to the
Supply and Demand Model

Given the baseline data on fire losses per billion cigarettes
and cigarette consumption, a model needs to be developed
to compute the loss impacts. The fire loss impacts have to
take into account both the direct effect of the change in the
probability of ignition expected from the cigarette modifica-
tion, as well as the indirect effect from a change in
consumption caused by cost and price changes. The model
must permit these direct and indirect effects to occur simul-
taneously so that their interaction can be correctly meas-
ured. The fire loss impact model musi also be compatible
with the supply and demand model so that the cigarette
consumption effects from the model can be included

'8See also Robert H Miller, “The Domestic Tobacco Markel A look

Ahead Through the 19805," Tobacco Situation, Economves, Statistics,
and Cooperatives Service, U.S. Dept. of Agriculture, TS-171 (March
1980, p. 32

vmiller, “The Domestic Tobacco Market, p. 32.

181985 Industrial Outlook, Section 43, “Tobacco,” Bureau of Industria!
Economics, U.S. Department of Commerce, pp. 43-45

The following computational equation for a single fire loss
category and a particular cigarette modification satisfies the
above modeling requirements:

Dy = ~ (EQ + El 4 EQcea El) Quay OPC,,
where D, = fire loss reduction in year y for the damage

category and modification,

EQea = proportional change in domestic cigarette
consumption as computed by the supply and
demand model,

El = proportional change in the ignition probability
due to the modification,

Quay = projected domestic cigarette consumption for
year y, and

DPC, = projected fire loss per cigarette in year y for the

damage category.

The third term within the parentheses accounts for the inter-
active effects between the two proportional changes. The
data that were used with this computational equation in the
impact analyses are presented in section 5.

4.3 Health Impact Model

The following adverse health effects have been attributed by
the Surgeon General to cigarette smoking: (1) shortened life,
(2) medical costs for the treatment of smoking-related
diseases, (3) complications of pregnancy, (4) productivity
losses, and (5) reduced quality of life.'9

In this section, a model is presented that estimates
changes in the first two of these health effects as generated
by modification-induced changes in cigarette consumption
and cigarette potency. Changes in consumption are caused
by changes in cigarette supply and demand attributed to the
modification. Potency changes are driven by changes in the
chemical composition of the modified cigarette.

4.3.1 Data Considerations

Health Data. A constraint in developing any working model
is the nature of available data. For estimating the health
costs of smoking, there are two basic approaches: (1)
prevalence-based, and (2) incidence-based. The prevalence-
based approach assigns health costs to the years in which
they are incurred, whereas the incidence-based approach
assigns the stream of health costs to the year in which the

19U.S. Dept of Health and Human Services, Reports of the Surgeon
General, 1982, 1983, 1984, 1986


coefficient of EP.a the wholesale price of cigarettes, is the
elasticity of demand with respect to the wholesale price and
is interpreted as the percentage change in quantity
demanded per percentage change in price. For example, if
the elasticity were 0.3, a ten percent increase in the
domestic wholesale price would mean a 3 percent decrease
in the quantity demanded. Eq (2) is the same kind of
demand equation for the export market, and Eq (3)
represents the total of the two markets and is the weighted
average of the changes in each market, weighted by their
quantity shares,

Eq (4) represents the supply of cigarettes in the domestic
market. The domestic supply is based on a cost function
that relates changes in the price of cigarettes to changes in
production costs of each component of the manufacturing
process. Thus, the domestic price is a function of the price
of tobacco and of the quantity of tobacco per cigarette as
well as of the paper and other costs. Each cost component
is weighted by its respective cost share. This specification of
domestic supply ‘mplies that changes in the unit cost of
manufacturing wil eventually be fully reflected in the real
price of cigarettes, other factors being equal. The use of this
specification is appropriate for industries with little evidence
of monopoly behavior, such as the cigarette industry.'? Note
that the model predicts an expected change in the real
(inflation free) price, that the adjustment may be gradual,
and that the change is measured in reference to what would
have happened in the absence of the cost change.

Eq (5) represents the supply of cigarettes in the export

Table 4.1 Structural Equations of
the Supply and Demand Model in
Proportional Change Form

1. Bea * —MeatFed + Flea
2+ Bee * “neetPee + ice
3. Fe + Bealiea + CL ~ BeddEQce
4. hcg * acalhcdPea + FE,”
where Peg" 1 + Hyg, and FE = orgileg + afk + ayEF

5. Bice * WRReg ~ 8 ~ Omcat Pe

fea) vhere y= 1/C1 = op)
6. Beg = ~neabPed + EMeFea + Bea

Te Ete * ~neekPed

8. te = Heated + C1 = BradeCce

9. Ee = €bPed

market. The export price is not subject to the federal excise
tax so that the proportional changes have to be weighted
accordingly. In addition, the export price differs from the
domestic price by the extent to which the modification costs
are NOT incurred for exported cigarettes. Because of this
parameter, the model is completely flexible with respect to
whether and to what extent cigarettes sold in the export
market are assumed to be subject to the design modifi
cations.

Eq (6) represents the derived demand function for domes:
tically grown tobacco used by U.S, manufactured cigarettes,
The quantity demanded depends on its price, the total
number of cigarettes produced, and the content of tobacco
per cigarette. In Eq (7) the quantity of domestic tobacco
demanded in the export market is a function solely of the
price. Eq (8) represents the total amount of tobacco
demanded in the two markets and is the weighted average
of the changes in each market, weighted by their quantity
shares. The supply of domestic tobacco is given in Eq (9)
and is a function of the price and of the parameter
representing the supply elasticity of tobacco which is deter-
mined primarily by federal agricultural policy.

This supply and demand model was adapted from one
originally developed to assess the impacts of changes in
federal cigarette excise tax policy.t? To construct a model
that permits analysis of the effects of cigarette design modifi-
cations, five of the nine equations of the tax policy model
had to be respecified. Eqs (1) and (2) were modified to allow
for domestic and foreign consumer responses to the design
modifications. Eq (4) had to be restructured to permit anal-
ysis of the changes in tobacco content, paper costs, and
other manufacturing costs caused by the modifications. Eq

Table 4.2 Definitions of Endogenous
Variables Used in the Supply and
Demand Model

Det tnteton

syabod vntee

ed = uane tty of U.S. ehgaretter gold In domeatte market year
Yee

Qs Tokal quanetty of U.S. efgeretter produced

Quaneity of U.S. cigarettes sold In export market tyear

year
Quancity of U.S. tobacco sold in domeatic market

ea Yoa/year

Quantity of U.S. cobacco eold fa export aarket Ybe/year

Qe Total quantity of U.5. tabacco produced Abe/year
Ped —*Pedce of chgarettes mold tn dowrerte marker $/1000
r Price of cigarettes aold in export market s/1000

Price of U.S. tobacco sold in domestic market sftp

"Daniel A. Sumner, "Measurement of Monoply Behavior: An Application
10 the Cigarette Industry," Journal of Political Economy, vol. 89, no. 5
{October 1981), pp. 1010-1079.

13Daniel A. Sumner and Michael K. Wohlgenant, ‘Effects of an increase
in the Federal Excise Tax on Cigarettes," American Journal of Agricul
tural Economics, Vol. 67, No. 2 (May 1985), pp. 235-242



these sources for information about the data beyond that
provided in this report.

5.1.2 Data Used to Solve the Supply and Demand
Model

The first category of data needed to solve the supply and
demand model consists of the values used for the model
parameters. Table 5.1 presents the most likely range and the
value within the range that has been used for each of the
parameters. The data for all but the last parameter are
drawn from the supporting study on agricultural data.?* The
share of modification costs not included in exported
cigarettes was set at 1.0 at the direction of the Technical
Study Group. This is equivalent to assuming that the envi-
sioned cigarette modifications would be required only for
cigarettes sold in the United States, and that separate
proauction facilities could be dedicated to cigarettes
destined for the export market.

The next data category for the supply and demand model
focuses on the proportional changes in each of the
exogenous variables. Since no reliable estimates are avail-
able for the exogenous variable specifying shifts in demand
that may result from the modifications, the Technical Study
Group recommended that the impact analyses be
conducted for no change in exported cigarettes and for
three alternative changes in the demand for domestic
cigarettes: no change, five percent increase, and five
percent decrease. For the three remaining exogenous vari-
ables, the values used in the impact analyses for four of the
cigarette modifications are drawn from the supporting study
on industry cost data.?® The cost data for the modification of
decreasing the paper porosity are based on discussions
with a representative of a major cigarette paper manufac-
turer, who indicated that decreasing paper porosity would
likely have little impact on paper costs, and that the direction
of change could be either up or down.?? The data for all five
modifications are presented in percentage change form in
table 5.2.

The third type of data needed for the supply and demand
model concerns the baseline values for the endogenous
variables. For example, the total number of cigarettes and
pounds of tobacco produced, and the current prices of
cigarettes and tobacco are needed. These are needed to
determine the absolute changes in prices and quantities (in
addition to the proportional or percentage changes). The
initial or baseline values used for the endogenous variables
in the impact analyses are presented in table 5.3 and are
drawn from the supporting study on agricultural data, as well
as from the cigarette industry report called the Maxwell
Report.

25Daniel A. Sumner. “The Impact of Cigarette Moaifications on the
Tobacco Production industry in the United States,” Report No. 6,
Technical Study Group, table 3.

2¢Armando M, Lago, and Jennifer A. Shannon, ‘Cost Analysis of Op:
tions for SeltExtinguishing Cigarettes,” Report No. 6, Technical Study
Group.

2Ciifford M. Kaulman, Ecusta Corporation, Pisgah Forest, NC, Interview
in Washington, D.C., July 1987.

26

5.1.3 Fire Loss Data

The baseline fire loss data that are used in the impact
analyses are presented in table 5.4. These are taken from
the supporting study on fire statistics. *

5.1.4 Health Impact Data

As noted in section 4.3, health data estimated using an
incidence-based approach are best suited to the purposes
of this study. According to Shultz,?°‘An analytical study by
Oster and colleagues represents the most sophisticated
application of this [incidence-based] methodoiogy to the
costs of cigarette smoking” Dr. Oster's health data, summa-
rized in the supporting study of health data, consist of
changes in years of life expectancy and in medical care
costs for the treatment of the three major diseases causally
linked to smoking: (1) lung cancer, (2) coronary heart
disease, and (3) chronic obstructive pulmonary disease.
These data. presented in tables 5.5 and 56, were used in
developing dose-response curves expressing health impacts
as a function of cigarette consumption. **

A limitation of these health data is that they are largely
based on studies done in the 1950's and 1960's. Because
the duration of smoking for both men and women at this
time was shorter than the duration of smoking for the current
population, the health data derived from these earlier studies
may be conservative estimates of actual health impacts
today.

Elasticity Data. The elasticity data used for estimating
health impacts** are as follows:

Total Retail Price Elasticity of Demand for Cigarettes: -0.42
Participation Retail Price
Elasticity of Demand for Cigarettes: -0.26

These retail elasticity values are based on the smoking
behavior of 20-74 year-olds. Both were found to be statisti-
cally significant at a 5% confidence interval on a two-tailed
test.

28 John R. Hall, Jr, ‘Expected Changes in Fire Damages from Reducing
Cigarette Ignition Propensity,” Report No. 5, Technical Study Group.

28.M Shullz, ‘Perspectives on the Economic Magnitude of Cigarette
Smoking,” New York State Journal of Medicine (July 1985), pp.
302-306

3°Gerry Oster, “Estimates of the Economic and Noneconomic Health
Consequences of Smoking, Smoking Cessation and Reductions in the
Amount Smoked," Report No. 6. Technical Study Group. This report
was based on earlier work reported in Oster, Colditz, and Kelly, "The
Economic Costs of Smoking and Benefits of Quitting for individual
Smokers,” Preventive Medicine, no. 13 (1984) pp. 377-389 and Oster,
Huse, Delea, and Colditz, "Cost-Effectiveness of Nicotine Gum as an
Adjunct to Physician's Advice Against Cigarette Smoking,” Journal of
the American Medical Association, no. 256 (1986) pp. 1315-1318.

*Lewit and Coate, ‘The Potential for Using Excise Taxes to Reduce
Smoking,” p. 136.


(Case 1, Continued)

B. Life-Year Health Impacts

Participation Effect, Ages 35-79

9 2 3
HY; = WI35-79 x QSP35-79 x UA/(CPD x NS35-79) x a Ll 2 Naso x Wa,s,1,i
a=l s=l i=

Participation Effect, Ages 25-34

34 2 3
+ WT75-34 x QSP25~34 x UA/(CPD x NS25-34) x } SPW(35-y),i * ) ). NSa,s,1 * S¥a=l,s,1,i
y=25 s=1 1-1

Consumption Effect, Ages 35-79

9 2 3
+ WI35-79 x QSC35-79/NS35-79 x) _) NSa,s,1 * BQYa,s,1,1
a=l s=1 1=1

Consumption Effect, Ages 25-34

34 23
+ WT25~34 * QSC25-34/NS25-34 x) SPW(35-y),i x) _) NSa,s,1 * BSYa=1,s,1,4
y=25 s=1 1=1

Case 2. No Lag, Cigarette Consumption Increase
A. Dollar-Value Health Impacts

Participation Effect, Ages 35-79

9 2 3
HS = WT35-79 x QSP35-79 x UA/(CPD x NS35~79) L L 2 NSa.so2 x Wa,s,1,i
azl s=l 1=

Participation Effect, Ages 25-34

34 2 3
+ WT25~34 * QSP25-34 * UA/(CPD x NS25-34) x 2, SPHCas-y) 4 x L 2 MSa.so1 * S$a=1,6,1,1
y= sel 1=

50


Table C.9

Modification: Increase Percentage of Expanded Tobacco from 25 to 50%
Assumptions: Four-year Grace Period, and a §.0% Increase in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = ~ 12.73 Paper Cost = 0.00 Other Cost = ~0.58

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Lite Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0) ie) ie) ie) (0) i} ie} ie} ie) 0) 1) ie}
1987 (0) 0 ie) 0 (0) ie} ie} 0 ie} t¢) i} (0)
1988 ie) i} 0) 0) 0 0 ie} 0 0 0) 0 0
1989 0 ie) ie} ie} ie) 0 0 0 0 ie) ie} ie}
1990 305 9354 1393 92 688 21128 3147 207 1072 32902 4901 323
1991 296 9074 135991 668 20497 3069 208 1040 31920 4780 319
1992 287 8816 1326 89 649 19914 2994 202 1010 31011 4663 314
1993 279 = 8549 1290 88 629 19310 2913 199 980 30072 4536 309
1994 272 ©8343 1260 87 614 18844 2847 196 956 29346 4434 306
1995 264 = 8090 1222 85 595 18274 2760 193 927 28458 4298 300

PV Sum (0%): 1702 52226 7850 532 3843 117968 17731 1201 5985 183710 27612 1871

PV Sum (5%): 1189 16159 5483 371 2686 36500 12386 838 4183 56841 19288 1305

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb - 0.03 -17
Domestic Tobacco Sales Million Lbs -55 -67
Export Tobacco Sales Million Lbs 19 3.4
Total Tobacco Revenue Million $ ~ 89 43
Quota Lease Revenue Million $ -33 ~10.8
Producers Surplus Million $ -9 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.47 -1.4
Domestic Cigarettes Sales Millions — 28846 5.4
Export Cigarettes Sales Millions 277 0.5
Total Cigarette Revenue Million $ 483 3.2
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 231 5.4
Consumers’ Surplus Million $ 1755 NLA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 11909 ~ 5764660
5% 2461 ~ 1139797

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

impact: ~ 1283 3373 ~44 315 1552 767 4682

68



Smoking Demographics Data. A method was needed for
combining the disaggregated health data which are age,
sex, and smoking-level specific in order to reflect average
health impacts that are properly weighted. The most
comprehensive data source on U.S. smoking behavior is the
National Health Interview Survey conducted by the National
Center for Health Statistics.21 From the National Health Inter-
view Survey results, data can be compiled on the numbers
of smokers by age, sex, and smoking level consistent with
the age groups and smoking-level categories defined by the
available health data.

Price Elasticity of Demand Data. An essential ingredient
in estimating health impacts of cigarette modifications is
predicting how consumers will respond to the modified ciga-
rette. Numerous studies have predicted consumer response
to a change in the price of cigarettes through estimating the
“price elasticity of demand’ for cigarettes. The most reliable
estimates of cigarette price elasticity to date appear in the
1982 study by Lewit and Coate.?? The health, smoking
demographics, and elasticity data used in the health impact
model are presented in section 5.1.3.

4.3.2. Requirements of the Model

Accommodate Consumption Changes of any Magni-
tude. A method was needed for arriving at the health
impacts of a variety of cigarette modifications. Each cigarette
modification may lead to a different change in cigarette
consumption. Thus, in order to accommodate any possible
change in cigarette consumption, health impacts have to be
determined on a per cigarette basis. In that way, per ciga-
rette health impacts can be applied to a change in cigarette
consumption of any magnitude.

Accommodate Consumption Increases and Decreases.
While one cigarette modification might be estimated to
increase cigarette consumption, another might be estimated
to decrease consumption. Since health impacts are
assumed to be asymmetric, the model has to be capable of
estimating health impacts separately for both increases and
decreases in cigarette consumption.

Include Health Impacts Over the Study Period. Some
health effects can be modeled as instantaneous. For people
in younger age groups, however, measurable health effects
of changes in smoking behavior may be delayed beyond the
time the modification is implemented. These delayed health
effects need to be phased in over the study period

Accommodate Alternative Discount Rates. Because of

U.S. Dept. of Health and Human Services. PHS, NCHS, Provisional
Data form the Health Promotion and Disease Prevention Supplement
to the National Health interview Survey: United States, January-March
1985, Hyattsville, MD, November 1985

22Eugene M. Lewit and Douglas Coate, "The Potential for Using Excise
Taxes to Reduce Smoking,” Journal of Health Economies, n0. 1
(1982), pp. 121-145,

20

uncertainty concerning the appropriate discount rate, it is
desirable that the model be able to accommodate alternative
discount rates.

Accommodate Implementation Lag. In order to assess
the effect of delaying implementation of the cigarette modifi-
cations, the model has to be capable of estimating health
impacts for cigarette modifications taking effect at different
points in the study period.

4.3.3 Eight-Step Modeling Procedure

In this section, the health impact model is described as an
eight-step procedure. The first four steps form the core of
the model and were developed for estimating instantaneous
health impacts due to a cigarette consumption decrease
occurring at the beginning of the study period and evalu-
ated at a zero discount rate. The last four steps integrate
desired features into the model, including the phasing in of
health impacts over the study period, and the changes
made to estimate health impacts for consumption increases,
for the implementation lag, and for a positive discount rate.
For a complete listing of all equations comprising the health
impact model, see appendix B.

STEP 1: Model the Elasticity Data
A cigarette modification may change the quantity of
cigarettes smoked in two ways: (1) by changing smoking
status (i.e, whether or not a person smokes), called the
“participation effect,’ and (2) by changing cigarette consump-
tion levels (i@, how much a smoker smokes), called the
“consumption effect” The participation effect is expressed in
terms of numbers of people changing smoking status, and
the consumption effect in terms of numbers of cigarettes
smoked by smokers. In order to properly account for both
effects, “quantity shares’ were estimated, indicating in
percent form what portion of the total change in cigarettes is
accounted for by the participation effect, and what portion
by the consumption effect. That is, the quantity shares give
the relative contributions of the participation and consump-
tion effects to changes in total cigarette consumption.

‘wo estimates of the price elasticity of demand for
cigarettes were used to determine quantity shares:

(1) A “total” price elasticity, giving the overall consumer
response to price changes, denominated in numbers of
cigarettes; and

(2) A “participation” price elasticity, giving that portion of the
overall response attributable to changes in smoking
status, denominated in numbers of people.

The quantity share value for the participation effect was esti-
mated by taking the ratio of the number of cigarettes
accounted for by the participation effect to the total change
in cigarette consumption. The cigarettes accounted for by
the participation effect were determined by (1) applying the
participation price elasticity to the number of smokers, giving


Table C. 27

Modification: Add Chemical to Tobacco Blend
Assumptions: Four-year Grace Period, and a 5.0% Increase in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 2.83

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 ie} i} ie} 0 0 0 0 0 ie} 0 ie}
1987 0 0 ie} ie) i) ie} 0 ie} 0 ie} 0 ie}
1988 ie} 0 ie} 0 ie) ie) ie) ie) 0 ie} ie) ie)
1989 0 ie) ie} 0 (0) 0 0 0 (e) ie} ie) 0
1990 316 9696 1444 95 696 21357 3181 209 1076 33017 4918 324
1991 306 9407 1409 94 675 20719 3102 207 1044 32031 4796 320
1992 298 9139 1374 93 656 20129 3027 204 1014 31119 4679 315
1993 289 8862 1337 91 636 19519 2945 201 983 30176 4552 310
1994 282 8648 1307 90 621 19048 2878 198 959 29448 4449 307
1995 273 8387 1267 88 602 18472 2790 195 930 28557 4313 301
PV Sum (0%): 1764 54140 8137 551 3885 119244 17923 1214 6006 184348 27708 1877
PV Sum (5%): 1233 16751 5684 384 2715 36895 § 12520 847 4197 57038 19355 1309

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.01 1.0
Domestic Tobacco Sales 29 Million Lbs 24
Export Tobacco Sales ~2.0 Million Lbs -1
Total Tobacco Revenue 2.0 Million $ at
Quota Lease Revenue 6.5 Million $ 20
Producers’ Surplus NA, Million $ 3

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes 2.0 /1000 0.68
Domestic Cigarettes Sales 44 Millions 23400
Export Cigarettes Sales -0.3 Millions ~ 160
Total Cigarette Revenue 6.4 Million $ 978
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue 44 Million $ 187
Consumers’ Surplus. NA. Million $ 127

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 9661 — 4676302
5% 1996 — 924605

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 471 2842 15 365 1238 622 5554

86


1 . Introduction

Zz
1.1. Background

The Cigarette Safety Act of 1984 (Public Law 98-567; Stat.
2925, October 30, 1984) created the Technical Study Group
(TSG) on Cigarette and Little Cigar Fire Safety to investigate
the technical and commercial feasibility, economic impact,
and other consequences of developing cigarettes and little
cigars with “minimum propensity” to ignite upholstered furni-
ture and mattresses. The TSG requested that the Applied
Economics Group (AEG) of the National Bureau of Stan-
dards (NBS) perform the economic impact analysis, and
arranged for the study to be done under an Interagency
Agreement between NBS and the Consumer Product Safety
Commission (CPSC) (!AG-74-25, Task Order No, 86-2 (86-
1198)). The agreement called for an analysis of economic
impacts to be performed and a report of findings to be
prepared by the AEG for the TSG in a written form suitable
for inclusion by the TSG in its final reporting to Congress.
This is the report on the economic impacts.

1.2 Purpose and Organization

The purpose of this report is to: (1) identify potential
economic impacts from reducing the ignition propensity of
cigarettes, (2) describe an approach and present a model
for assessing economic impacts, and (3) give findings for
selected case analyses.

The report is organized into five main sections, 3 appen-
dices, and an executive summary. The remainder of section
1 outlines the technical approach, describes the scope of
the study, and discusses some constraints. Section 2
describes five hypothetical modifications to cigarette design
which are later used in the case analyses. Section 3 explains
why modifying cigarettes in various ways would be expected
to have economic impact, and identifies major categories of
impact. Section 4 discusses the economic impact model
which was developed to enable quantitative evaluation of the
impacts of modifying cigarettes. Section 5 presents all the
input data and the results for selected case analyses,
discusses the sensitivity of findings to key data and assump-
tions, summarizes the impact analyses, and discusses impli-
cations. The three appendices give additional information on
the economic impact model and results of the case

analyses: appendix A derives the solution equations of the
supply and demand equilibrium model; appendix B lists
equations of the health component of the economic impact
model; and appendix C shows detailed tables of impact
from which summary tables in section 5 were prepared.
Supporting studies performed for the TSG by consultants are
referenced in section 5, and are provided in Reports 5 and
6 of the TSG reports.

1.3. Technical Approach and Scope
of Study

This study employs conventional techniques of benefit-cost
analysis as set forth by Mishan and as described by
Thompson.’ This kind of approach entails identifying and
valuing positive impacts (benefits) and negative impacts
(costs) resulting from alternative courses of action, from the
perspective of the decision maker, with the objective of
assisting the decision maker to choose among the alterna-
tives. Because in this application most categories of impact
may be either positive or negative depending on the partic-
ular cigarette modification evaluated, and because multiple
units of valuation are used rather than the monetary unit
customary in benefit-cost analysis, the term ‘impact’ is used
to denote all changes rather than the terms “benefit” and
“cost,” and the study is termed an “impact analysis”

Familiarity with the general approach of impact or benefit:
cost analysis is useful for understanding this study. There-
tore, a brief overview of the approach and a discussion of
some key issues are given before turning to the specifics of
the study.

The simplest and most manageable form of benefit-cost
analysis is that applied to a private sector decision where all
effects may be combined and expressed as a single kind of
effect, measurable in dollars. An example is an analysis of
the impacts of alternative plant locations on the accounting
profitability (net benefits) of a company. Benefit-cost analysis
in support of public decisions, in contrast, tends to
encompass broader concerns and multiple dimensions

"See E J. Mishan, Cost-Benefit Analysis. An introduction (New York,
NY. Praeger Publications, 1976); and Mark S. Thompson, Benefit-Cost
Analysis for Program Evaluation (Beverly Hills, CA: Sage Publications,
1980.)


Table C.10

Modification: Increase Percentage of Expanded Tobacco from 25 to 50%
Assumptions: immediate Implementation, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = - 12.73 Paper Cost = 0.00

Change in Tar and Nicotine (%): 0.0

Other Cost = -0.58

eine =

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 409 12558 1846 113 825 25337 3725 229 1242 38117 5603 344
1987 395 12126 1783 112 797 24467 3597 226 1199 36808 5411 340
1988 383 11748 1730 «(111 772 23704 3490 224 1162 35660 5250 336
1989 372 11407 1690 110 750 23015 3409 221 1128 34624 5129 333
1990 359 11023 1642 108 725 22241 3313 218 1090 33459 4984 328
1991 348 10694 1601 107 703° 21577 3231 215 1058 32460 4860 324
1992 338 10389 1562 105 683 20962 3152 212 1027 31536 4742 320
1993 328 10075 1520 104 662 20328 3066 209 996 30581 4613 315
1994 320 ©9832 1485 102 646 19837 2997 207 972 29843 4509 311
1995 311 9534 1440 101 627 19237 2906 203 943 28939 4371 305

PV Sum (0%): 3564 109386 16299 1073 7190 220705 32886 2164 10817 332024 49473 3256

Pv Sum (5%): 2786 37856 12721 833 5620 76382 25667 1680 8455 114908 38614 2527

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb ~0.04 ~27
Domestic Tobacco Sales Million Lbs ~87 -9.6
Export Tobacco Sales Million Lbs 32 5.4
Total Tobacco Revenue Million $ ~ 140 ~6.2
Quota Lease Revenue Million $ 57 -16.9
Producers’ Surplus Million $ -14 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 -0.49 -1.5
Domestic Cigarettes Sales Millions 2542 0.4
Export Cigarettes Sales Millions 477 07
Total Cigarette Revenue Million $ 214 -1.3
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 20 0.4
Consumers’ Surplus Million $ 287 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 1030 ~ 501000
5% 248 ~ 114993

Employment impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: — 1915 350 ~61 33 161 68 — 1366

69



Table C.16

Modification:
Assumptions:
Cost Impacts (%):
Change in Tar and Nicotine (%):

Increase Paper Weight from 24 to 32 grams per square
Immediate Implementation, and No Change in Domestic
Tobacco Content = 0.00 Paper Cost = 48.20
0.0

meter
Cigarette Demand
Other Cost = 0.33

First-Order impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 416 12778 1878 115 830 25484 3746 230 1244 38190 5614 345
1987 402 12339 1814 114 802 24609 3618 227 1201 36878 5422 340
1988 389 11954 1760 113 777 23841 3510 225 1164 35728 5260 337
1989 378 11607 1719 112 754 23148 3429 223 1130 34690 5138 334
1990 365 11216 1671 110 729 22370 3332 219 1092 33523 4994 329
1991 355 10881 1629 109 707 21702 3250 217 1060 32523 4870 325
1992 344 10571 1590 107 687 21084 3170 214 1029 31596 4751 320
1993 334 10251 1546 105 666 20445 3084 210 998 30639 4622 315
1994 326 10004 1511 104 650 19952 3014 208 974 29900 4517 311
1995 316 9701 1465 102 630 19348 2922 204 945 28995 4379 306

PV Sum (0%): 3626 111303 16584 1091 7232 221983 33076 2177 10838 332663 49568 3262

PV Sum (5%): 2834 38520 12944 847 5653 76824 25816 1690 8472 115129 38688 2532

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco S/Lb - 0.00 -0.0
Domestic Tobacco Sales Million Lbs -1 -0.1
Export Tobacco Sales Million Lbs 0 01
Total Tobacco Revenue Million $ -1 -0.1
Quota Lease Revenue Million $ -1 0.2
Producers’ Surplus Million $ -0 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.16 05
Domestic Cigarettes Sales Millions ~ 818 -0.1
Export Cigarettes Sales Millions 6 0.0
Total Cigarette Revenue Million $ 71 0.4
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ -7 -0.1
Consumers’ Surplus. Million $ -92 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PY 1986 Million $) (PV Years)
0% - 329 189769
5% ~73 41091

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 16 6 -1 491 —43 ~22 415

75



Executive Summary

In response to requirements of the Cigarette Safety Act of
1984, this report investigates potential economic impacts of
modifying cigarettes to reduce their ignition propensity. It
identifies impacts which appear likely to result from altering
major physical characteristics of cigarettes: tobacco blend,
paper, and size. It develops a quantitative model for
estimating first- and second-order impacts. First-order
impacts are changes in smoking-related fire losses, including
estimates of the change in lives (and life years) lost, injuries
incurred, and property damage. Second-order impacts are
changes which may result if modifying the ignition propen-
sity of cigarettes inadvertently modifies other cigarette
attributes. The following second-order impacts are estimated
by the model: cigarette industry impacts, including changes
in the price of cigarettes, cigarette sales volume, and
industry revenue; tobacco farming impacts, including
changes in the price of tobacco, tobacco sales volume, and
farm revenue; smoking related health impacts, including
changes in lifetime medical costs and life expectancies;
consumer surplus impacts; employment impacts; and excise
tax revenue impacts. A number of case analyses are
performed, quantitative results are presented, and implica-
tions of the findings are discussed.

Because this assessment precedes any action to alter the
ignition propensity of cigarettes in the marketplace, it must
be predicated upon a number of assumptions. The need to
make assumptions— such as assumptions about how
cigarettes might be modified physically to reduce their igni-
tion propensity, the extent of and time required for the chan-
geover, and the reaction of manufacturers and consumers to
an altered product—was a recognized condition and limita-
tion of the study, and one that should be kept in mind in
reading the report.

To help meet the extensive data requirements for
performing quantitative impact assessment, the Technical
Study Group (TSG), commissioned by Congress to imple-
ment research requirements of the Cigarette Safety Act,
engaged under separate contract seven consultants, experts
in their respective six fields. The TSG made available to the
authors the data and reports developed by these
contractors. (See Reports 5 and 6, Technical Study Group.)
The accuracy of these data has not been verified by the
National Bureau of Standards.

vil

Given the necessity to make a number of assumptions
and to use data to which varying levels of confidence can
be attached, the findings are subject to uncertainties, To
reflect these uncertainties, case analyses based on alterna-
tive assumptions are shown, as well as the results of exten-
sive sensitivity testing.

These caveats notwithstanding, the following major points
can be drawn from the analyses:

* If cigarettes were to be made completely fire safe, each
year about 1500 people fewer would die in fires, roughly
7000 fewer people would be injured in fires, and nearly
half a billion dollars in property losses would be avoided
To the extent that the fire hazard of cigarettes is not
completely eliminated by reducing their ignition propen-
sity, savings will be proportionately lower.

The savings potential from fire-safe cigarettes is estimated
to decline gradually over tirne, but is likely to remain reta-
tively strong over at least the next 10 years. A projected
downward trend in cigarette consumption, an increase in
the prevalence of fire-resistant bedding and upholstery,
and improvements in fire mitigation technologies are esti-
mated to diminish deaths and injuries from cigarette fires
by 20 to 25 percent and property losses, by about 10
percent by the mid-1990's.

If, in the process of modifying cigarettes to change their
ignition propensity, other attributes were to be changed,
impacts beyond the intended reduction of cigarette-fire
losses will likely result.

— Acchange in the mix or quantities of raw materials,
labor, and/or production processes for manufacturing
cigarettes would change the relative demand for the
factors of production used in cigarette production.

— Achange in the cost of producing cigarettes could
affect their pricing and therefore their consumption.

— A-cchange in smoking attributes, such as taste, appear-
ance. handling characteristics, and potency could affect
consumer demand and therefore cigarette consumption

~ A-change in chemical potency could directly affect the
health consequences of smoking by changing the delivery
of tar, nicotine, carbon monoxide. and other chemicals in
cigarettes.

Five hypothetical methods of modifying cigarettes (listed in
the first column of the summary table on page xiii) are
used in this study to facilitate model development, to allow
identification of the types of potential impacts, and to test

.


Table C.14
Modification:
Assumptions:
Cost Impacts (%):
Change in Tar and Nicotine (%):

Tobacco Content = 0.00
0.0

Increase Paper Weight from 24 to 32 grams per square meter
Four-year Grace Period, and a 5.0% Decrease in Domestic Cigarette Demand
Paper Cost = 48.20

Other Cost = 0.33

First-Order Impacts:

Fire impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 ie) ie) ie) ie) 0 ie) 0) te) ie) 10) ie)
1987 0 te) i?) ie) 0 ie) 0 0) 0 ie) ie) 0
1988 0 i} i) (0) 0 ie} 0 i) ie) ie} 10) 0
1989 ie} (0) 19} ie) ie) 0 ie} 0 ie} 0 0 i?)
1990 420 12884 1919 126 765 23481 3498 230 1110 34079 5077 334
1991 407 12499 1872 125 742 22781 3411 227 1077 33062 4951 330
1992 396 12143 1826 123 721 22132 3328 224 1046 32120 4830 326
1993 38411775 1776 «(121 699 21461 3237 221 1015 31147 4699 320
1994 374 11491 1736 120 682 20944 3164 218 990 30396 4592 317
1995 363 11143 1683 117 662 20309 3068 214 960 29475 4452 311

PV Sum (0%): 2344 71936 10812 732 4271 131108 19706 1335 6199 190280 28600 1938

PV Sum (5%): 1638 22258 7553 511 2985 40566 13765 931 4332 58874 19978 1351

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb ~ 0,02 ot
Domestic Tobacco Sales Million Lbs 28 -3.4
Export Tobacco Sales Million Lbs 13 23
Total Tobacco Revenue Million $ -47 -2.3
Quota Lease Revenue Million $ —23 ~74
Producers’ Surplus Million $ -4 NLA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.13 04
Domestic Cigarettes Sales Millions — 27243 ~5.1
Export Cigarettes Sales Millions 186 03
Total Cigarette Revenue Million $ ~ 632 -4.4
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~218 ~5.1
Consumers’ Surplus Million $ — 1566 NA,

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% ~ 10984 6329962
5% ~21i7 1187158

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 548 — 3042 ~18 164 ~ 1444 ~724 ~ 5610

73



Table C. 25

Modification:
Assumptions:

Cost Impacts (%):

Add Chemical to Tobacco Blend
Four-year Grace Period, and No Change in Domestic Cigarette Demand

Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 2.83
Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0) te) 0 (e) ie) 0 ie) 0 ie) 0 ie} oO
1987 ie} ie) i) 0 i id) te) ie) 0 0 (0) ie)
1988 0 0 i) 0 0 0 ie) 0 0 0 ie) (0)
1989 (0) 0 0 ie) 0 0) 0 0 0 ie) ie) ie}
1990 370 11364 1693 111 732 22468 3347 220 1094 33573 5001 329
1991 359 11025 1651 110 710 21798 3264 218 1061 32570 4877 325
1992 349 10711 1611 109 690 21177 3184 215 1031 31643 4758 321
1993 338 10386 1567 107 669 20535 3098 ran 1000 30684 4629 316
1994 330 10136 1531 106 653 20040 3028 209 976 29944 4524 312
1995 320 9829 1485 104 633 19433 2935 205 946 29037 4386 306

PV Sum (0%): 2067 63451 9537 646 4087 125451 18856 1277 6107 187451 28175 1909

PV Sum (5%): 1445 19632 6662 451 2856 38815 13171 891 4268 57999 19681 1331

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb -0.00 -01
Domestic Tobacco Sales Million Los -3 ~04
Export Tobacco Sales Million Lbs 1 0.3
Total Tobacco Revenue Million $ -5 -0.3
Quota Lease Revenue Million $ -3 -08
Producers’ Surplus Million $ -0 NA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.65 1.9
Domestic Cigarettes Sales Millions -3095 -0.6
Export Cigarettes Sales Millions al 0.0
Total Cigarette Revenue Million $ 267 1.8
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~25 -0.6
Consumers’ Surplus Million $ -347 N.A.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% ~ 1248 719149
5% 241 134873

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: -62 ~ 205 -2 81 — 164 - 82 -435



Case 3.

Four-Year Lag, Cigarette Consumption Decrease

A. Dollar-Value Health Impacts

Participation Effect, Ages 35-79

9 2 3

4$, =WT35-79 x SPW4,4 x QSP35-79 x UA/(CPD x NS35-79) x} ) } NSa,s,1 * QSa,s,1,i

+WT31-34

WT25~30

+WT35-79

+WT31-34

+WT25-30

x

x

x

x

a=l1 s=] 1=1

Participation Effect, Ages 31-34

34-2 «3
SPW4,i X QSP25-34 x UA/(CPD x NS31]-34)x J } ) NSa,s,1 * Wa=1,s,1,i
y=31 s=1 1=1

Participation Effect, Ages 25-30

30 2 3
QSP25-34 x UA/(CPD x NS75-39) } SPW(35-y),i ) } NSa,s,1 * S$a=1,s,1,4
y=25 sel 1=1

Consumption Effect, Ages 35-79

9 2 3
SPW4,i * Q8C35-79/NS35-79 x ] } J NSa,s,1 * BQSa,s,1,1
a=1 s=1 1=1

Consumption Effect, Ages 31-34
34 2 3

SPW4,1 * QSC25-34/NS31-34 x}  ) NSa,s,1 * BQSa=1,s,1,1
y=31 s=1 1=1

Consumption Effect, Ages 25-30

30 2 3
Q8C25~34/NS25-30 x} SPW(35-y),4 ) ) NSa,s,1 * BSS$a-1,8,1,4
y=25 sel 1=1

52




inputs, the derived change in tobacco demand will reflect
not only a change in the quantity of cigarettes sold, but also
in the tobacco content of each cigarette.

impacts on tobacco farming are distributed among the
following four different groups:

(1) Growers—those who manage the farming activity;

(2) Landowners— those who own the land on which the
tobacco is grown;

(3) Quota holders—those who own the right to grow
tobacco, and

(4) Farm laborers.

The impact of cigarette design modifications on tobacco
farming is influenced significantly by government agricultural
policy. Shifts in demand for tobacco can be responded to by
a range of changes in quota allotments, causing varying
combinations of adjustment in tobacco sales and price. This
policy affects the distribution of revenue impacts among the
above groups.

Tobacco farming impacts are likely to be highly concen:
trated in several states. particularly North Carolina and
Kentucky, the major tobacco-producing states. The impact
analyses of section 5, however, do not show impacts at the
regional level

Impacts on sales of tobacco are measured in millions of
pounds of tobacco sold; impacts on tobacco revenue, in
millions of dollars. Impacts are estimated for one year only,
the first year they are assumed to occur. Changes in annual
revenue from tobacco farming may persist as tobacco
farmers are likely to find it difficult in the short-run to shift to
other crops of equal or higher value.

Health Impacts

in addition to the impacts on life and limb associated with
tire losses, there are potential health impacts associated with
modification-induced changes in cigarette consumption and
the chemical composition of cigarettes. At a press confer-
ence releasing the 1986 Surgeon General's Report of The
Health Consequences of involuntary Smoking, Surgeon
General C. Everett Koop, M.D., stated:'*

Previous reports have documented the tremendous health
burden caused by tobacco use, particularly regular cigarette
use. In the 1982 report on cancer we concluded that ciga-
rette smoking was the single largest cause of excess cancer
mortality in the United States, in 1983 our report on cardi-
ovascular disease identified cigarette smoking as the most
important moditiable risk factor for coronary heart disease;

TM’Remarkes by C. Everett Koop, M.D., Surgeon General, at Press
Conference Rleasing the 1986 Surgeon General's Report on The
Health Consequences of Involuntary Smoking,” Press Release, U.S.
Dept. of Health and Human Services, (December 16, 1986), p. 1

and in 1984 cigarette smoking was found to be the major
cause of chronic obstructive lung disease in the United
States population

The scientific data which establish these increased risks
for disease among smokers is now overwhelming, totaling
more than 50,000 studies from dozens of cultures. It is esti-
mated that smoking is responsible for well over 300,000
deaths annually in the United States, representing approxi-
mately 15 percent of all deaths.

By relating disease incidence to smoking levels, and
estimating the economic consequence of disease, the
economic impacts of changes in smoking levels can be esti-
mated. Changes in cigarette consumption associated with
different design modifications can thereby be translated into
estimated health impacts.

Health impacts are estimated in the study as changes in
incidence-based lifetime medical costs measured in
expected value dollars, and as changes in life expectancies
(i.e, life years saved or lost) attributable to a modification of
cigarette design. The impact measures do not include
changes in the dollar value of productive output foregone or
changes in the quality of life due to modification-induced
changes in morbidity, disability, and premature mortality.

Health impacts from changes in the chemical composition
of cigarettes can be estimated by the economic impact
model if the necessary data are provided. However, the
appropriate values to assign to the parameters which define
the relationship between the tar, nicotine, and CO content,
and smoking-related medical costs and life expectancies for
the five modifications are unknown

Health issues not addressed by the economic impact
model and not taken into account in the health data used in
the case analyses include: (1) omission of passive smoking
effects; and (2) possible understatement of health costs to
women smokers due to recent changes in inhalation
patterns and increased use of oral contraceptives.

Consumers’ Surplus impacts
“Consumers surplus” is used in benefit-cost analysis of public
programs as a measure of the net change in welfare caused
by a project or policy—an increase in consumers’ surplus
indicating an improvement in social welfare, and a decrease,
a detriment. Consumers’ surplus is defined as the amount a
user would be willing to pay for a good, a service, or a right
less its cost to him or her. Consumers surplus may be
increased either by increasing consumers’ willingness to pay
(.e., increasing demand) or by decreasing production cost
(.e, increasing supply), since either increases the excess of
willingness to pay over cost. Hence, a policy which reduces
the cost of cigarettes to consumers, without adversely
affecting cigarettes, or which increases consumer demand
for cigarettes, is considered to increase consumers’ surplus.
The economic impact model is capable of measuring the
change in consumers’ surplus resulting from both changes
in cost and changes in demand.

Because the consumers surplus concept is measured by
the willingness to pay based on the observed market price
actually paid, it fails to capture certain nonmarket payments


Table 5.15 Impacts of Decreasing Paper Porosity from 35 to 10 Coresta Units:

Summary
Change in
Impacts _ Amount _
First-Order Impacts
Fire*
Lives saved OR 4,300
Life-years gained 57,900
Injuries avoided 19,600
Property loss avoided (mill.$) 1,300
Second-Order Impacts
Tobacco Farming?
Tobacco price ($/Ib.) (0)
Domestic sales (mill. lbs.) 0
Tobacco revenue (mill.$) 0
Cigarette industry”
Cigarette price ($/1000) fo)
Domestic sales (mill.cig.) ie}
Cigarette revenue (mill.$) 0
Tax and Consumer”
Fed. Excise Tax Rev. (mill.$) ie}
Consumer Surplus (mill.$) io}
Health*
Medical costs (mill.$) 0
Life-years (PV yrs.) 0
Employment,
Tobacco Sector (FT equiv.jobs) 0
Cigarette Sector (FT equiv.jobs) 0
Other (FT equiv.jobs) i)

Four-Year Grace Period

immediate Implementation

Change in Change in Change in
_Percent_ _Amount_ Percent
75.0 8,500 75.0
75.0 115,000 75.0
75.0 38,700 75.0
75.0 2,500 75.0
0) 0 ie}
0 ie} ie)
0 0 ie}
0) ie} ie}
0) 0) 0
i) ie} ie}
ie} i?) 0
QO 0
0 i)
0)
ie}
0 ie}
0

(a) All fire impacts (10-year period) and health impacts (lifetime) are given in present values at a 5% discount rate; fire loss
savings assume a 75 percent reduction in the probability of ignition.

(b) Reported for one year only (the first year impact occurs).

mated to reduce the costs of producing cigarettes. An
increase in the percent of expanded tobacco in the blend
from 25 percent to 50 percent is estimated to reduce
domestic tobacco content of cigarettes by 12.73 percent.
Other costs, which include imported tobacco, are estimated
to decline on net by 0.58 percent. Overall the decrease in
production cost is estimated at about 1 percent.

Table 5.12 summarizes the results of two case analyses
for this modification. (See appendix tables C.7 through C.12
for more detailed results.) Impacts are comparable to those
for decreased cigarette circumference. Taking the case of
unchanged demand, there are positive fire loss savings:
negative tobacco farm impacts; mixed cigarette industry

193-B49 0 - 87 - 4

39

impacts; positive tax and consumer impacts; undesirable
health impacts (ignoring possible effects of reduced tar,
nicotine, and CO content); and employment impacts that are
mixed among sectors, but negative overall. Fire loss impacts
tend to be slightly larger than those for decreased cigarette
circumference because the secondary consumption effect is
smaller in this case. Other impacts tend to be somewhat
smaller for this modification than for the previous one for the
same reason.


analysis yielded findings with important implications for deci-
sion making

The potential direct benefit from eliminating the cigarette
fire loss problem was found to be substantial: a savings
potential each year of more than 1500 lives now lost to
cigarette fires, roughly 7000 fire-related injuries, and close to
half a billion dollars of property damage. Although it was
initially hypothesized that this savings potential would fall
dramatically over the next 10 years, this hypothesis was not
supported by findings. It was projected that 10 years from
now the potential for saving lives and avoiding injury will be
about 75 percent as large as now, and that the potential for
averting property damage will be about 90 percent as large.

In the absence of specific ignition performance data for
the hypothesized design modifications, the direct potential
fire loss impacts are estimated by applying 25, 50 and 75
percent reduction rates. The resulting benchmarks otf fire
damage reductions can be used for comparing
performance-based results when they become available.

The quantitative analysis of second-order impacts focused
on those estimated to result from changes in the factors of
production and costs of manufacturing cigarettes.

* If it is assumed that the supply price of cigarettes fully
reflects changes in production costs~ and if consumer
demand and cigarette potency are held constant—
second-order impacts are estimated to be relatively small
In percentage terms tor the five modifications.

* The estimated changes in production costs which drive
the secondary impacts range between ~3 and +2
percent.

* The largest percentage sector changes are estimated for
tobacco farming and tobacco industry employment for
those modifications which entail a reduction in tobacco
content. For example, tobacco farm revenue is estimated
to fall by 15 percent and jobs in tobacco-related indus-
tries by 4 percent in response to a decrease in cigarette
circumference. Furthermore, these impacts are likely to
be concentrated regionally.

Cost-driven health impacts, though estimated at no more
than a one percent increase in smoking-related medical
costs, appear large in absolute dollars. This is because
they are taken as a percentage change in lifetime
incidence-based medical costs and this base is a very
large number. (In contrast, some of the impacts are esti
mated for one year only, or for a 10-year period only.)
Cost-driven health impacts are positive for modifications
which are estimated to increase production costs and
thereby decrease cigarette consumption. and vice-versa.

Excise revenue impacts are estimated to be small~ no
more than a 1 percent change ($50 million per year)—
and represent transfer payments between sectors of the
economy.

Cigarette industry impacts are also estimated to be small,
ranging from a 3 percent decrease in revenue for a

43

decreased circumference cigarette, to a 2 percent
increase for a chemical additive.

* Smokers are assumed to benefit (gain in consumers’
surplus) from a modification which lowers cigarette prices
below what prices otherwise would have been, and
vice-versa

It is important to note, however, that changes in consumer
demand and changes in chemical potency are two addi
tional sources of potential secondary impact not accounted
for by the cost-driven changes discussed above.

* Analyses were performed of the impact of hypothetical
demand shifts, and the effect of a given shift can be
described: A modification which results in an increase in
demand for cigarettes can be expected to have positive
impact on the farm sector, the cigarette industry, excise
taxes, and employment, and negative health impacts.
However, there is little basis for specifying shifts in
demand for these modifications.

Use of the impact model with hypothetical changes in
cigarette potency demonstrated large potential effects on
secondary health impacts.

Including potential secondary impacts of cigarette modifi-
cation in the study is not to diminish or obfuscate the objec-
tive of fire safety. To make sound decisions regarding fire
safety requires as full an understanding as possible of the
consequences of alternative actions. This understanding
may allow undesirable consequences of actions to be
avoided, overcome, or neutralized. For example, it may be
possible to choose cigarette design modifications with fewer
secondary impacts, or to use tax policy, statute, and techno-
logical innovation to neutralize unwanted side effects


Table C.13

Modification: increase Paper Weight from 24 to 32 grams per square meter
Assumptions: Four-year Grace Period, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 48.20 Other Cost = 0.33

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Lite Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 te) 0) 0 0 0 0 0) i?) 0 0 0
1987 ie} ie} ie) ie} ie) ie} 0 ie} 0 (0) 0 ie)
1988 0 0 ie} ie) 0 ie} 0 i} 0 ie} i} ie}
1989 0 ie) 0 0 ie) ie} 0 ie) i¢) (0) 10) 0)
1990 365 11216 1671 110 729 22370 3332 219 1092 33523 4994 329
1991 355 10881 1629 109 707 21702 3250 217 1060 32523 4870 325
1992 344 10571 1590 107 687 21084 3170 214 1029 31596 4751 320
1993 334 10251 1546 105 666 20445 3084 210 998 30639 4622 315
1994 326 10004 1541 104 650 19952 3014 208 974 29900 4517 311
1995 316 9701 1465 102 630 19348 2922 = 204 945 28995 4379 306

PV Sum (0%): 2040 62626 9413 638 4069 124901 18773 1272 6098 187176 28134 1906

PV Sum (5%): 1426 19377 6575 445 2844 38645 13114 887 4261 57914 19652 1329

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb ~0.00 -0.0
Domestic Tobacco Sales Million Lbs -1 -01
Export Tobacco Sales Million Lbs 0 04
Total Tobacco Revenue Million $ ~1 -0.1
Quota Lease Revenue Million $ -1 ~0.2
Producers’ Surplus Million $ -0 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.16 05
Domestic Cigarettes Sales Millions -748 -01
Export Cigarettes Sales Millions 5 0.0
Total Cigarette Revenue Million $ 65 0.4
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~6 -01
Consumers’ Surplus Million $ ~84 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% -301 173716
5% -58 32580

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 15 5 -0 449 -40 ~20 379

72



2. Cigarette Modifications

2.1 Five Hypothetical Cigarette
Modifications

At the direction of the TSG, five hypothetical cigarette modifi
cations are used in the study. They are used to facilitate
model development, to allow identification of types of poten
tial impacts, and to test the order of magnitude of impacts
which may result from representative modifications.
Hypothetical modifications are used because the results of
laboratory experiment upon which more definitive prototype
cigarette designs might have been based were not available.

The five selected are identified by type and briefly described

in table 2.1

Note that inclusion of these particular modifications in the
study does not indicate that they are necessarily the best
ways of improving cigarette fire safety. Other approaches

may be superior. But this selection ~ (1) a reduction in ciga-

rette circumference to increase burn rate, (2) an increase in
the percentage of expanded tobacco to decrease the avail-
able fuel, (3) an additive to the blend to cause self-
extinguishment, (4) an increase in the weight of the paper
(with porosity held constant), and (5) a decrease in the
porosity of the paper (with weight held constant) to increase
the insulating function of the paper—covers each of the
major physical components of cigarettes. To treat these
modifications requires development of a versatile model
capable of treating a modification of any major cigarette
component. It is expected that other cigarette modifications
that may be proposed at a later time also can be evaluated
with the economic impact model, if specific cost data are
provided in the required format.

2.2. The Baseline Cigarette

lo provide a standard or baseline against which the modi-
fied cigarettes can be compared, a “prevalent pre-
modification cigarette’ is defined. This prevalent cigarette is
assumed to have a tobacco column blended of about 35
percent flue-cured, 32 percent burley, 13 percent Maryland
and oriental, and 20 percent reconstituted tobacco, plus
flavorings. Its total column length, including filter, is about 85
mm long, and it is about 25 mm in circumference. Its paper

is a single, smooth layer, made from flax straw, weighing
about 24 g/m?, with a porosity of about 35 Coresta units,
about 65 mm long and 275 mm wide (which exceeds the
cigarette circumference to allow overlap).

It is assumed that each modification is to this prevalent
cigarette. It is further assumed that all domestic cigarettes
are modified uniformly, either immediately or after a four-year
delay.

Table 2.1 Five Cigarette Modifications
Selected For Impact Assessment

Type of Modification Specification

Decrease from 25 mm to
21mm

1. Change in
Circumference

2. Change in Tobacco Increase Expanded from
Blend 25% to 50% of Blend

3. Self-Extinguishing Add 150 g of Chemical
Chemical Additive to to Blend per 1000
Blend Cigarettes

4. Change Paper Increase Paper Weight

from 24 g/m? to 32 g/m?

5. Change Paper Decrease Paper Porosity

from 35 to 10 Coresta

Units



Appenaix A

Derivation of the Solution Equations for the
Supply and Demand Equilibrium Model

Ther system of the nine equations that comprise the supply
and demand equilibrium model presented in Table 4.1 of
section 4 can be solved using the method of substitution
The objective is to express at least one of the endogenous
variables in explicit form independent of the other
endogenous variables. the endogenous variable that
represents the key to this system of equations turns out to
be |Pra, the domestic price of tobacco. The explicit solution
for this variable is derived in the following seven steps.

A. Start with eq (8):
(8) EQe * Beaded + Hea Eee

2. Use Eqs (6) and (7) for FQeq and Ete, respectively:

Ee Beal~ neakPea + EQcFeq + Fra) ~ nell ~ ScadEPeae

3. Use Fas (1) and (2) eubstituced {nto (3) to replace EQe:

Qe = ~ BranealPed + SedFralBed(- redlPed + FDca) +
Gh ~ BeadacetFce + EDce) + Fuca] ~ ave(l ~ BeadEPed:

Ae Use Ege (4) and (5) to Feplace EFcg and EPce, respectively:
EQ * [> Beaned ~ nel! ~ Bra) ]EPed

+ BeaFcalBeal-nca) (rat PeaFea + FC) + PcaBDeal
+ BedFea( ~ Bead(-nee)Ylacd®Pea(Fed ~ OFUrg) + CL ~ DEC]

+ beaFea(l ~ ca)Bice * BealcaFea:

Collect teras frum Scep 4 (onpeclally coeffictencs of EM):

EQ + EPealTM Sedfed ~ Mee! ~ Bed) ~ SedtleatedteaF eg
~ BedFeal) = Bea Meettedl Feu ~ 88Uea))

~ BeaBcatedF rate

+ BradedtedFed

~ Beall ~ Beg meer

orFaBe

+ Weall ~ Bea)EDce + BeaPUedT Fra

47

6. By defining 1 as the expression for all the coefficients of EPra,
this expression for £9 can be sore simply stated as Eq (10).

(10) EQ, = = AEPEg + Seated Ede - negEC)Fea

+ Bpa(l ~ Bea) [Eee ~ neer(! ~ EC] Pea + SrableaFeas
where A * BraacdPtdlBedtedPed + (1 ~ Bea)ncer(Fea ~ *BUeg)] + Beated
+ (1 ~ Beadnees

2. The first solution equation, that for the domestic price of tobacco, ts
obtained by equatiog Eqs. (9) and (10):

CEPed * ~AEPed + BeaSicd(EDed ~ cdbC)Feg
+ Bra(l ~ Bea) [EDce ~ neey(1 - @)ECIFty + BeableaFra-
C1) Reg = FeaSealded(Bbeg - nedBG) + (1 ~ Bea) (Edge ~ acer ~ 8)EC)

+ Bipal/(e + 11.

Eq (11) expresses EPra, the proportional change in the
domestic price of tobacco as an explicit function of only the
parameters and and the exogenous variables. !t represents
a solution because there are no endogenous var:ables in
the function. Because of the structure of the remaining
equations in the model, this solution equation for EPia
represents the solution for the entire system of equations.
That is, EPia can be substituted into Eq (4) to obtain the
solution for the price of domestic cigarettes, EPca. Then,
EP.a and EP;a can be used to solve Eq (5) for the price of
exported cigarettes. Eqs (1), (2) and (3) can then be solved
for the quantities of cigarettes sold in both markets. The
remaining four equations are solved in a similar fashion
Table 4.5 in section 4 presents the equations used to
compute solution values for the endogenous variables.




Table C.5
Modification:
Assumptions:
Cost Impacts (%):

Change in Tar and Nicotine (%):

Tobacco Content =

0.0

~29.40

Decrease Circumference from 25 to 21 millimeters
Immediate Implementation, and a 5.0% Decrease in Domestic Cigarette Demand
Paper Cost = ~ 16.00

Other Cost =

-1.40

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss _lives Years Injured Loss
1986 464 14245 2094 129 862 26462 3890 239 1260 38679 5686 349
1987 448 13756 2022 «127 833 25553 3757 236 1217 37351 5491 345
1988 434 13327 1962 126 807 24756 3645 234 1179 36186 5328 341
1989 422 12939 1917 124 783 24037 3560 231 1145 35134 5204 338
1990 407 12504 1863 123 757 23228 3460 228 1106 33953 5058 333
1991 395 12131 1816 121 734 22535 3374 225 1073 32939 4932 329
1992 384 11785 1772 119 713 21893 3292 222 1043 32001 4812 324
1993 372 11428 1724 118 692 21230 3203 218 1011 31032 4681 319
1994 363 11153 1685 116 675 20718 3130 216 987 30283 4575 315
1995 352 10815 1634 114 655 20090 3035 212 957 29366 4436 310

PV Sum (0%): 4043 124082 18489 1217 7510 230503 34346 2260 10977 336923 50203 3304

PV Sum (5%): 3160 42943 14430 945 5870 79773 26807 1755 8580 116603 39183 2565

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco S/Lb ~0.09 -5.8
Domestic Tobacco Sales Million Los ~ 234 — 26.0
Export Tobacco Sales Million Lbs. 70 11.6
Total Tobacco Revenue Million $ - 363 ~16.1
Quota Lease Revenue Million $ -116 ~ 34.3
Producers’ Surplus Million $ -40 NA

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 ~1.14 -3.4
Domestic Cigarettes Sales Millions — 23219 -40
Export Cigarettes Sales Millions 1033 1.6
Total Cigarette Revenue Million $ — 1220 -73
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~ 186 -4.0
Consumers’ Surplus Million $ ~ 986 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% — 9344 5383399
5% ~ 2085 1165669

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~ 5764 ~ 4333 ~ 184 ~ 480 - 1182 617 — 12562

64



illness first appears. As noted in Hartunian et a/,?°

Whether the prevalence or the incidence methodology is
the more relevant depends on the issues at stake. For deci-
sion makers concerned with controlling current medical
costs and absenteeism, the prevalence approach is superior.
For decision makers evaluating preventive and ameliorative
programs, the prevalence approach is misleading, inasmuch
as it largely focuses on the current costs of conditions that
commenced in the past and that present preventive
programs cannot affect.

The annual value of a disease vaccination program — say,

20N.S Hartunian, C.N. Smart, and M.S. Thompson, “The Incidence and

Economic Costs of Cancer, Motor Vehicle injuries, Coronary Heart
Disease, and Stroke: A Comparative Analysis," American Journal of
Public Health, vol. 70, no. 12 (December 1980) pp. 1249-1260.

for polio — not benefiting previous disease victims is best
calculated following the incidence approach. In contrast, the
benefits of a program improving the functioning of afflicted
individuals — some of whom acquired the condition years
earlier — would best be valued according to the prevalence
approach.

Inasmuch as a modification-induced change in cigarette
consumption may affect the future costs of persons currently
disease-free, rather than the current costs among the ill, the
incidence-based approach is likely to be the preferred
approach. Health data from the incidence-based approach
typically consist of estimates, for selected discount rates, of
the changes in present value lifetime health care costs and
in years of life expectancy per person by age and sex which
are estimated to result from smoking at (and quitting from)
specified levels of cigarette consumption.

Table 4.7 Actual and Projected Total and Per Capita Consumption of Cigarettes

Cigarette Resident Population Per Capita
Consumption (16 yrs. and over) Cigarette
Year {in billions) {in thousands) Consumption
Actual Cigarette Consumption
1976 598.91 159,847 3,746.77
1977 603.88 162,898 3,707.10
1978 604.82 165,932 3,644.99
1979 612.04 168,952 3,622.57
1980 618.57 171,953 3,597.32
1981 627.15 174,516 3,593.65
1982 624.01 176,822 3,529.03
1983 596.19 178,966 3,331.30
1984 600.17 180,979 3,316.24
1985 $93.14 183,009 3,241.04
Projected Cigarette Consumption
1986 578.66 184,569.6 3,134.67
1987 568.62 186,631.6 3,046.77
1988 557.22 188,323.6 2,958.87
1989 545.14 189,879.6 2,870.97
1990 532.39 191,294.6 2,783.07
1991 519.54 192,766.6 2,695.17
1992 506.23 194,160.6 2,607.27
1993 492.90 195.643.6 2,519.37
1994 479.23 197,095.6 2,431.47
1995 465.58 198,664.6 2,343.57

DATA SOURCES: The figures on total cigarette consumption for the years 1976 to 1985 were taken from The Maxwell Report, Year-end Sales Esti-
mates for the Cigarette Industry, by Maxwell Associates, A Division of Furman, Selz, Mager, Dietz & Birney, Inc., New York. The
data on U.S. resident population came from the Current Population Reports, Series P-25, Nos. 917, 952, and 985, U.S. Department

of Commerce, Bureau of the Census.


Table C.3

Modification: Decrease Circumference from 25 to 21 millimeters
Assumptions: Four-year Grace Period. and 5.0% Increase in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = -29.40 Paper Cost = - 16.00 Other Cost =

Change in Tar and Nicotine (%): 0.0

1.40

First-Order Impacts:

Year 25% Fewer Fires 50% Fewer Fires

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
75% Fewer Fires

Life Number Prop Life Number Prop Live Number Prop

Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss

1986 0 e) ie) ie) 1) (0) (0) 0 0 0 0
1987 0 0 0 0) 0 0 ie) 0 ie) 0 ie)
1988 10) 0 ie} 0 0 0) i} ie} i} i) ie)
1989 (¢) 0 0 i} ie) 0) 0 ie} 0 0 0
1990 298 = 9161 1365 90 684 21000 3128 206 1070 32838 4892 322
1991 290 8888 1331 89 664 20373 3051 203 1038 31858 4770 318
1992 281 8635 1298 88 645 19793 2976 201 1008 30951 4654 314
1993 273 = 8373 1263 86 625 19193 2895 197 978 30013 4528 309
1994 266 «8171 1234 85 610 18730 2830 195 954 29289 4425 305
1995 258 7924 1197 84 592 18163 2743 191 925 28402 4290 299

PV Sum (0%): 1666 51151 7688 521 3820 117251 17623 1194 5974 183351 27559 1867

PV Sum (5%): 1165 15826 5370 363 2669 36278 12310 833 4174 56730 19251 1302

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb — 0.06 4.2
Domestic Tobacco Sales Million Lbs -175 ~21.3
Export Tobacco Sales Million Lbs 46 84
Total Tobacco Revenue Million $ ~272 -13.2
Quota Lease Revenue Million $ -78 ~25.2
Producers’ Surplus Million $ -31 NA

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 -1.412 ~3.3
Domestic Cigarettes Sales Millions 31905 6.0
Export Cigarettes Sales Millions 687 1.2
Total Cigarette Revenue Million $ 203 1.3
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 255 6.0
Consumers’ Surplus Milkon $ 2110 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 13172 6376008
5% 2722 — 1260674
Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):
Sector: Tobacco Cigarette Warehouse Support Wholesaie Retail TOTAL
Impact: ~ 4509 2163 — 144 — 133 —1736 848 228

62



(Case 4, Continued)

B. Life-Year Health Impacts

Participation Effect, Ages 35-79

9 2 3

HY; =WT35-79 x SPWa,4 X QSP35-79 * UA/(CPD x NS35~79) x) }  } NSaig,1 X QYa,s,1,i
1

+WT31-34

+WT25-30

+WT35-79

+WT31~34

+WT25-30

x

x

x

a=l s=] l=

Participation Effect, Ages 31-34

34 2 3
SPW4,i * QSP25-34 x UA/(CPD x NS31-34)x J} J J NSajg,1 * Wa=1,s,1,1
y=31 s=1 1=1

Participation Effect, Ages 25-30

30 2 3
QSP25-34 x UA/(CPD x NSz5~39) } SPW(35~y) 44 2} NSa,s,1 * S¥a=1,8,1,i
y=25 s=1 1=1

Consumption Effect, Ages 35-79
92

3
SPW4 i * QSC35~79/NS35-79 x ) =} ) NSa,g,1 * BS¥a,s,1',1
a=l s=1 1=1

Consumption Effect, Ages 31-34
34 2 3

SPW4,4 % QSC25~34/NS31-34 x ] | } NSa,s,1 * BSYae1,s,1',4
y=31 s=]1 1=1

Consumption Effect, Ages 25-30

30 2 3
Q8C25-34/NS25-30 x } SPW(35-y),i ) 1 NSa,s,1 * BSYa=1,s,1',£
y=25 s=1 1=1

55




Table 5.3 Definitions, Range, and Values of Endogenous Variables Used in the

Supply and Demand Model

Symbol Definition Units Range Value Used
Qea Quantity of U.S. cigarettes sold in domestic market billion/year 560 - 600 583
Qe Quantity of U.S. cigarettes sold in export market billion/year 60 - 80 65
Qe Total quantity of U.S. cigarettes produced billion/year 620 ~ 680 648
Qa Quantity of U.S. tobacco sold in domestic market million lbs/year 800 - 1000 900
Qte Quantity of U.S. tobacco sold in export market million lbs/year 500 ~ 700 600
%t Total quantity of U.S. tobacco produced million lbs/year 1300 ~ 1700 1500
Ped Price of cigarettes sold in domestic market $/1,000 33 - 36 33.75
Poe Price of cigarettes sold in export market $/1,000 25 - 28 25.75
Pea Price of U.S. tobacco sold in domestic market $/1b 1.40 - 1.60 1.50

in the United States,” Report No. 6, Technical Study Group.

January 1987.

Sources: D. A. Sumner, “A Study of the Impact of Cigarette Modifications on the Tobacco Production Industry

J. C. Maxwell, Jr., The Maxwell Report; Year-End Sales Estimates for the Cigarette Industry,

effectiveness of the modification: 25 percent, 50 percent, Table 5.4 Baseline Data Used to
and 75 percent reductions in the probability of igniting furni Compute Fire Loss impacts.

ture and mattresses. In addition to the information on
impacts for each of the ten years, the results for the entire

(Per Billion Cigarettes Consumed)

study period are summarized by computing the present —
value of each impact series for both a zero discount rate Ce
and a five percent rate. The zero discount rate is equivalent
to a direct summing of the yearly impacts over the study Property Loss
period. Year Fires Deaths Injuries (Thousand $)
Note that when a positive discount rate is used on life
years, a two-fold discounting process occurs. First, the 1986 369.2 2.845 12.837 789
conversion of each undiscounted life saved to its equivalent 1987 356.9 2.816 12.707 798
number of years of extended life requires that the future 1988 344.9 2.784 12.581 806
added years be discounted to the time of the life saving 1989 333.8 2.763 12.562 816
Second, each converted life year must then be discounted 1990 322.5 2.734 12.501 823
to the present from the time of occurrence of the saving of 1991 311.7 2718 12.492 833
the life. Thus, as is apparent from table 5.10, the effect of 1992 301.4 2.710 12.508 843
discounting on the number of life years saved is much 1993 291.2 2.699 12.497 852
greater than on the other fire impact measures. 1994 281.6 2.709 12.562 866
It is necessary to discount lives and life-years saved, as 1995 271.7 2.704 12,536 875
well as dollars, in order to preserve a consistent relationship wove
between dollars and lives/life-years over time. This is a
required procedure for making cost-effective decisions SOURCE: John R. Hall, Jr., “Expected Changes in Fire

involving expenditures on life-safety programs.

To illustrate the problem that arises from failure to main- Propensity,” Report No.

tain a consistent time relationship between dollars and lives, Group.

Damages from Reducing Cigarette Ignition
5, Technical Study


Appendix B

Specification of the Health Impact Model

Case 1. No Lag, Cigarette Consumption Decrease
A. Dollar-Value Health Impacts

Participation Effect, Ages 35-79

9 2 3
H$j = W235-79 x QSP35~79 x UA/(CPD x NS35-79) x) } J NSa,s,1 * QSa,s,1,4
a=1 s=1 1l=1

Participation Effect, Ages 25-34

34 2 3
+ WI25-34 x QSP25~34 x UA/(CPD x NS25~34) x 2, SPMC35-y) 4 x L 2 Saved * S$a=1,5,1,4
y= s=1 12

Consumption Effect, Ages 35-79

9 2 3
+ WT35-79 x QSC35~79/NS35-79 x] ] Y NSa,s,1 * BQSa,s,1,4
a=1 s=1 1=1

Consumption Effect, Ages 25-34

34 2 3
+ WT 25-34 x QSC25~34/NS25-34 x] SPW(35-y),i *) ] NSa,s,1 * BS$a=1,8,1,4
y=25 s=1 1=1

49


(5) was respecified because federal tax policy is not being
changed by the cigarette modifications and to give the
model flexibility to accommodate alternative assumptions
about the extent to which exported cigarettes share in the
costs of the design modifications. Some exported cigarettes
may be modified because they share the same production
facilities. Eq (6) was restructured to account for changes in
the domestic tobacco content of cigarettes resulting from the
design modifications. The remaining four equations required
no changes.

The system of nine equations presented in table 4.1 can
be solved using the method of substitution. The objective is
to express at least one of the endogenous variables in
explicit form independent of the other endogenous variables.
Thus, this variable would be a function exclusively of the
known parameters and the known exogenous variables. This
function permits the clirect computation of the equilibrium
solution value of the variable, which in turn can be used to
compute the solution values of the remaining endogenous
variables. The key endogenous variable in this system of
equations turns out to be EPia the domestic wholesale price
of tobacco. The explicit form solution for this variable is
derived in detail in appendix A.

The solution equations for the supply and demand model
are presented in Table 4.5. The equations are numbered in
the order in which they are to be used for computing the
solutions to each of the endogenous variables. Once the first
equation has been used to compute the proportional
change in the domestic price of tobacco, the answer is

Table 4.3 Definitions of Parameters
Used in the Structural Equations and in

substituted into the second equation to obtain the price
change for domestic cigarettes. Then these results can be
used to solve the third equation to get the change in the
price of exported cigarettes. In a similar fashion, the
remainder of the endogenous variables can be solved.

4.1.2 Data Requirements for the Supply and Demand
Model

To use the solution equations to obtain quantitative economic
impact estimates, considerable data requirements must be
satisfied. The first requirement is for specific values for the
parameters listed in table 4.3. There are six elasticities to be
established. The elasticity of domestic demand for cigarettes
has been studied extensively. Warner summarizes a number
of recent estimates of this elasticity with respect to the retail
price of cigarettes, and they range from 0.4 to 1.3.14 Such a
retail elasticity can be converted to the wholesale equivalent
needed by the mode! by multiplying by the ratio of whole-
sale to retail prices. The other five elasticities are discussed
in some detail by Sumner and Wohlgenant. The five cost
share parameters can be established by dividing relevant
cost data available from the US Department of Agriculture
(USDA) by the wholesale price of cigarettes. The two quan-
tity shares for cigarettes and tobacco are available from the

Table 4.4 Definitions of Exogenous
Variables Used in the Supply and
Demand Model

the Computation of the Immediate 2
Impacts of the Supply and Demand
Model Syebot Def tateton Struccaral
Bquation(s)
Bee Proportional Change in Export 2
nea Derived demand elasticity for domestic tobacco Bea Sroporctona? Qunge Ep uate Doneatte 45,6
aed Quantity share of U.S. tobacco in U.S. cigarettes
te ts 4 “Kenneth E. Warner, “Consumption Impacts of a Change in the Federal
° Share of odtficatton coats got tacluded in exported cigarettes Excise Tax.” The Cigarette Excise Tax: April 17, 1985. Smoking
Behavior and Policy Conference Series (Cambridge, MA’ Harvard
University, Institute for the Study of Smoking Behaviour and Policy,
1985), pp. 88-105.

15


Table C. 23
Modification:
Assumptions:
Cost Impacts (%):

Decrease Paper Porosity from 35 to 10 Coresta Units

Tobacco Content = 0.00 Paper Cost = 0.00

immediate Implementation, and a 5.0% Decrease in Domestic Cigarette Demand
Other Cost = 0.00

Change in Tar and Nicotine (%): 0.0
First-Order lmpacts:
Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years injured Loss
1986 476 14624 2150 132 870 26715 3927 241 1264 38805 5705 351
1987 460 14122 2076 130 840 25797 3793 238 1221 37473 5509 346
1988 446 13681 2014 129 814 24993 3680 236 1183 36304 5345 342
1989 433 13284 1968 128 791 24266 3594 233 1148 35249 5221 339
1990 418 12837 1912 126 764 23450 3493 230 1110 34063 5074 334
1991 406 12454 1865 124 741 22750 3407 227 1077 33047 4948 330
1992 394 12099 1819 123 720 22102 3324 224 1046 32105 4828 325
1993 382 11732 1770 121 698 21433 3233 220 1014 31133 4696 320
1994 373 11449 1730 119 681 20916 3160 218 990 30382 4590 316
1995 362 11103 1677 117 661 20282 3063 214 960 29462 4450 311

PV Sum (0%): 4150 127384 18981 1249 7581 232704 34674 2282 11013 338024 50367 3315

PV Sum (5%): 3244 44085 14814 970 5926 80535 27063 1771 8608 116984 39311 2573

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco S/Lb ~0.02 -14
Domestic Tobacco Sales Million Lbs -30 -33
Export Tobacco Sales Million Lbs 13 2.2
Total Tobacco Revenue Million $ ~ 50 ~22
Quota Lease Revenue Million $ —24 -7.2
Producers’ Surplus Million $ -4 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 ~0.03 -01
Domestic Cigarettes Sales Millions ~ 29006 -5.0
Export Cigarettes Sales Millions 198 0.3
Total Cigarette Revenue Million $ -758 -45
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~ 232 -5.0
Consumers’ Surplus Million $ - 1624 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% ~ 11673 6725126
5% ~ 2605 1456193

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: — 584 — 3336 -19 -3i1 — 1535 -771 ~ 6556

82



Table 5.12 Impacts of Increasing the Percentage of Expanded Tobacco from 25

to 50 Percent: Summary

Sa nan ce SAS AAT I NA a NTN EIN SANS

Fol ear Grace Period immediate Implementation
Change in Change in Change in Change in
Impacts Amount __Percent Amount _ Percent
First-Order Impacts
Fire*
Lives saved OR 4,300 75.0 8,500 75.0
Life-years gained 57,800 75.0 115,000 75.0
Injuries avoided 19,600 75.0 38,600 75.0
Property loss avoided (mill.$) 1,300 75.0 2,500 75.0
Second-Order Impacts
Tobacco Farming”
Tobacco price ($/lb.) -0.04 ~2.7 -0.04 ~27
Domestic sales (mill.lbs.) ~80 ~96 ~90 -9.6
Tobacco revenue (mill.$) -130 -6.2 ~140 -6.2
Cigarette Industry”
Cigarette price ($/1000) -0.49 -27 -0.04 -27
Domestic sales (mill.cig.) 2,300 0.4 2,500 0.4
Cigarette revenue (mill.$) - 190 -1.3 -210 -13
Tax and Consumer”
Fed. Excise Tax Rev. (mill.$) 20 0.4 20 0.4
Consumer Surplus (mill.$) 260 290
Health*
Medical costs (mill.$) 200 250 0
Life-years (PV yrs.) 91,000 115,000
Employmenty
Tobacco Sector (FT equiv.jobs) - 1,700 - 1,900
Cigarette Sector (FT equiv.jobs) 320 350 -10
Other (FT equiv.jobs) 180 200

(a) All fire impacts (10-year period) and health impacts (lifetime) are given in present values at a 5% discount rate; fire loss
savings assume a 75 percent reduction in the probability of ignition

(b) Reported for one year only (the first year impact occurs).

sales (as may be seen from the next section on cigarette
industry impacts), tobacco sales are estimated to fall by
nearly 25 percent, an estimated decline of 190 million
pounds of tobacco leaf in 1990, the first year the modifica-
tion is assumed to occur. As a result of the lower price and
lower sales, annual tobacco revenue is estimated to decline
$300 million, a reduction of about 15 percent.

The next section of the table shows cigarette industry
impé to be mixed. The lower production costs are esti-
mated to cause the cigarette price to fall about 3 percent, or
$1.13 per 1000 cigarettes. The lower price is expected to
stimulate a 1 percent increase in cigarette sales, which
annually would amount to over 5 billion cigarettes. Despite

36

the forecast of higher sales, industry revenue is estimated to
decline by 3 percent or $460 million per year due to the
lower price.

Impacts on federal excise tax revenue and consumer
satisfaction, summarized in the next section, are both esti-
mated to be positive. Because the federal excise tax rate is
levied as a function of the quantity of cigarettes sold rather
than price, federal excise tax revenue is estimated to rise as
a result of the decrease in cigarette circumference. An esti-
mated 1 percent increase means $45 million extra in annual
excise tax revenue. The fall in cigarette price is estimated to
generate an annual increase in consumers’ surplus of $600
million, by increasing the difference between what



Table C.18

Modification:
Assumptions:

Cost Impacts (%):

Increase Paper Weight from 24 to 32 grams per square meter

Immediate Implementation, and a 5.0% Increase in Domestic Cigarette Demand
Tobacco Content = 0.00

Change in Tar and Nicotine (%): 0.0

Paper Cost = 48.20

Other Cost =

0.33

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

750

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 354 10878 1599 98 789 24217 3560 219 1224 37557 5521 339
1987 342 10504 1544 97 762 23386 3438 216 1182 36267 5332 335
1988 332 10177 1498 96 738 22656 3336 214 1145 35136 5173 331
1989 322 9881 1464 95 717 21998 3258 212 W111 34115 5053 328
1990 311 9549 1422 94 693 21258 3167 208 1074 32967 4911 323
1991 302 9264 1387 92 672 20624 3088 206 1042 31983 4789 319
1992 293 9000 1353.91 653 20036 3013 203 1012 31072 4672 315
1993 284 = =8727 1317 90 633 19429 2931 200 982 30131 4545 310
1994 277 8517 1287 89 618 18960 2864 197 958 29404 4442 306
1995 269 8259 1247 87 599 18386 2777 194 929 28514 4307 301

PV Sum (0%): 3087 94755 14119 929 6873 210951 31432 2069 10658 327147 48746 3208

PV Sum (5%): 2413 32793 11020 721 5372 73006 24533 1606 8331 113220 38046 2490

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb —0.02 “it
Domestic Tobacco Sales Million Lbs 29 3.2
Export Tobacco Sales Million Lbs -13 -2.2
Total Tobacco Revenue Million $ 49 2.2
Quota Lease Revenue Million $ 24 71
Producers’ Surplus Million $ 4 NA,

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.18 0.5
Domestic Cigarettes Sales Millions 28187 48
Export Cigarettes Sales Millions - 193 -0.3
Total Cigarette Revenue Million $ 835 5.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 225 48
Consumers’ Surplus Million $ 1529 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 11428 - 5556291
5% 2751 — 1275318

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 567 3342 18 803 1491 6971

77



Case 4.

Four Year Lag, Cigarette Consumption Increase

A. Dollar-Value Health Impacts

Participation Effect, Ages 35-79

9 2 3

HS; =WT35-79 x SPW, 4 x QSP35-79 x UA/(CPD x NS35-79) x} 2B NSa,s51 x Ga,s,1,i

+WT31-34

+WT25-30

+13 5-79

4HT3 1-34

+WT25-30

x

x

x

x

x

a=l s=l Is

Participation Effect, Ages 31-34

34.2 °«3
SPW4,4 X QSP25~34 x UA/(CPD x NS31-34)x ) ) } NSa,s,1 * Wa=l,s,1,i
y=3l s=1 1-1

Participation Effect, Ages 25-30

30 2 3
QSP25-34 x UA/(CPD x NS25-30) 1 SPHGs-y) 4 I L NSa,s,1 ¥ S$a=1,s,1,i
yz s=l 15

Consumption Effect, Ages 35-79

9 2 3
SPW4,i X QSC35-79/NS35-79 x) J NSa,s,1 * BS$a,5,1',4
a=1 s=1 1-1

Consumption Effect, Ages 31-34
34 2 3

SPWa,4 x QSC25-34/NS31-34 x) 1 ) NSa,s,1 * BS$a=1,8,1',4
y=3l s=l 1=1

Consumption Effect, Ages 25-30

30 203
Q8C25~34/NS25-30 oe eee YY NSa,s,1 ¥ BS$as1,s,1',i

54


Table C.19

Modification: Decrease Paper Porosity from 35 to 10 Coresta Units
Assumptions: Four-year Grace Period, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 0.00

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire tmpacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 0 0 ie) 0 ie} i) 0 i} ie) io} ie} ie}
1987 ie} 0 ie} ie) ie} ie) 0 ie) ie) ie} 0 ie)
1988 ie) ie} ie} 0 ie) io) ie} 0 ie} ie} 0 ie}
1989 0 ie} i?) ie) ie} ie} ie) ie) 0 0 i) ie)
1990 364 11169 1664 110 728 22338 3328 219 1092 33508 4992 329
1991 353 10836 1623 108 706 21672 3245 216 1059 32507 4868 325
1992 343 10527 1583 107 686 21054 3166 213 1029. 31581 4749 320
1993 333 10208 1540 105 665 20417 3080 210 998 30625 4620 315
1994 325 9962 1505 104 649 19924 3010 208 974 29886 4515 314
1995 315 9660 1459 102 629 19321 2918 204 944 28981 4377 306

PV Sum (0%): 2032 62363 9373 635 4064 124726 18747 = 1270 6095 187089 28120 1905

PV Sum (5%): 1420 19296 6548 443 2840 38591 13095 886 4259 57887 19643 1329

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb ~ 0.00 ~1.41
Domestic Tobacco Sales Million Lbs 0 0.0
Export Tobacco Sales Million Los ie} 0.0
Total Tobacco Revenue Million $ ie} 0.0
Quota Lease Revenue Million $ 0 0.0
Producers’ Surplus Million $ i?) NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.00 0.0
Domestic Cigarettes Sales Millions ie) 0.0
Export Cigarettes Sales Millions 0 0.0
Total Cigarette Revenue Million $ 0 0.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ te) 0.0
Consumers’ Surplus Million $ 0 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 0 0
5% 0 ie)

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 0 0 10} i} (0) 0 ie}

78


AS) H§; (Qeal365) EQea RS, and
AY, = HYi (Qea/365) EQea RS.
where A$, = aggregate US. health impacts, in dollars of
health care costs, for discount rate i,

AY, — =aggregate U.S. health impacts, in years of
lite-expectancy, for discount rate |,

H$; = dollar-value health impacts per cigarette ‘at
risk” per day, for discount rate i,

HY; =!life-year health impacts per cigarette ‘at
risk’ per day, for discount rate i,

Qea = total U.S. annual average cigarette

consumption,

365  =days per year, for converting annual ciga
rette consumption to daily cigarette
consumption,

EQea = proportional change in U.S. cigarette
consumption, and

RS = proportion of U.S. cigarette consumption

subject to health impacts.

Adjusting Health Impacts for Changes in Tar, Nicotine,
and CO Content. The aggregate health impacts detailed
above are based only on changes in cigarette consumption
resulting from modification-induced changes In cigarette
price, taste and other smoking attributes. If the cigarette
modification also changes tar, nicotine, and CO content, then
health impacts might be affected. A cigarette potency adjust.
ment can be added to the equations above for estimating
aggregate health impacts given changes in tar, nicotine, and
CO content, but the effect of changes in cigarette chemical
composition on health care costs and life expectancies is not
clear. It may be assumed that health care costs and life
expectancies change in some proportion to cigarette chem-
ical composition, If this relationship can be specified as
proportional, the equations above for computing aggregate
health impacts can be modified as follows:

Replace EQca with [EQca + Pp EN + EQea)),

where p = the proportion of health care costs and life
expectancies attributable to tar, nicotine, and
CO, and

EN = the proportional change in tar, nicotine, and
CO content.

193-849 0 - 87 - 3

23

4.4 Employment Impacts

Estimation of the employment effects of the cigarette modifi
cations requires several types of data and an impact model
that is linked to the supply and demand model.

4.4.1 Data Requirements for Employment impacts

There are three types of data needed to estimate employ:
ment impacts. First, data are needed on the baseline levels
of employment in each of the economic sectors expected to
be significantly affected by the cigarette modifications. These
sectors are tobacco farming, cigarette manufacturing,
tobacco warehousing, non-tobacco cigarette support indus-
tries such as paper and energy, cigarette wholesaling, and
cigarette retailing. Second, data are required on the direct
employment impacts expected from each of the modifica-
tions. Direct impacts in this context refer to those that result
immediately from changes in the production process without
taking into account possible changes in the levels of
tobacco and cigarette production. These data must be
collected by interviews and analysis of how the modifications
might affect the production process. Third, data are needed
for each economic sector on the elasticities of employment
with respect to levels of production. For example, it must be
known by what percent employment in cigarette wholesaling
is expected to change for every one percent change in ciga-
rette production. The employment data used in selected
impact analyses are presented in section 5.

4.4.2 Employment Impact Model and Linkage to the
Supply and Demand Model

The employment impact model must compute the direct and
the indirect impacts for each of the cigarette modifications
and each of the economic sectors affected. The following
equation permits such computation for a particular modifica-
tion and is linked to the results of the supply and demand
model

Wi = Di + mi Ni EQi,
where W; = employment impact for the ith economic
sector,
Dl, = direct employment impact for the ith
economic sector,
elasticity of employment for the ith
economic sector,
Nj = baseline employment in the ith economic
sector, and
EQ; = proportional change in the production level
of the commodity relevant to the ith
economic sector.


changes in taste, handling characteristics, and other
factors related to consumer demand. There is little basis
for specifying shifts in demand for these modifications,
though sensitivity analysis can be used to demonstrate
the effect of hypothetical demand changes. Decreasing
demand can be expected to have negative impacts on
the farm sector. the cigarette industry, excise taxes, and
employment, and positive impacts on health; increasing
demand, the opposite impacts. For example, if lowering
the tobacco content (by decreasing circumference or
tobacco density) were to cause a small decrease in
demand for cigarettes, the reduced demand would offset
to some extent several of the second-order impacts shown
in the table for these two modifications, namely the
increased health costs and the increased consumer
surplus, and would amplify other second-order impacts,
namely, the decreased farm revenue, cigarette revenue,
and employment.

* Certain impacts are likely to be highly concentrated
regionally: primarily farming and cigarette manufacturing
impacts and tobacco-industry employment impacts.

It is important to note that the modifications included in

the study are not necessarily the best approaches for
improving the fire safety of cigarettes. They were designated
for use in the economic analysis by the Technical Study
Group in order to cover principal physical characteristics of
cigarettes which can be altered. Structuring the model to
handle these modifications required that versatility be built
into the model, making it capable of treating changes in any
major cigarette component. Other cigarette modifications
which may be proposed at a later time can be evaluated
with the economic impact model, if specific cost data are
provided in the required format.

It is also important to place the findings of the study in
proper perspective. The purpose here is to assess the
impacts that might arise from making fire-safe cigarettes, not
to advocate the pursuit of impacts other than the objective of
fire safety. Other objectives should be judged on their own
merits. Understanding the secondary, as well as the primary,
consequences of actions is essential for sound policy
development. To the extent that undesired second-order
impacts arise, it may be possible by tax policy, by statute, or
by technological innovation to neutralize them, such that the
benefits of fire safety are not eclipsed by other impacts.

Estimated Impacts of Five Cigarette Design Modifications: Summary Comparison

First-Order Impacts Second-Order Impacts
Cigarette Fire-Loss Reductions Change in ‘Change in Change in Change in Lifetime. Change in Fulltime
in Year 1 (Based on Tobacco, Cigprete—“Fedxtisg Change in ‘Smoking-Related Equivalent Jobs in
Uniform 75% Reduction Farming Industry Tax Consumer ____Health Costs Tobacco-Related
Revenue “Revenue == ‘Revenue Surplus Medical Expected Industrles
Property in Year 1 in Year 1 in Year 1 in Year 1 Costs _Life-Yrs, In Year 1
Lives Injuries Loss Avoded
Mogificaton Saved Avoided mit % mis % mis % mill S millS % mill (1000) % Jobs
Decreased
Circumlerence 1200 5600 350 18-330 -3 -500 + 0 660 + sro 260 4 ~6200
Decreased
Tobacco Density 1200 S600 360 -6 -140 -1 -210 0 2 290 0 280-110 -1 1400
Chemical Additive
to Blend 1200 5600 350 0-100 2 1 80 ~380 0-300 © 470 0-500
Iroreased Paper
Weight 1200 5600 360 0 0 0 % 0 0 90 0 -7%0 40 0 400
Decreased Paper
Posty 1200 5600 360 o 0 0 6 9 oO 0 0 8 0 o 0

ASSUMPTIONS: — Uniform 75% reduction in smoking-related fire losses to be achieved by each modification
Supply price fully reflects changes in production costs
— Percentages rounded to nearest integer; millions of dollars rounded to nearest 10 million; numbers of lives, injuries, and jobs

rounded to nearest hundred; life-years rounded to nearest thousand. Percentages in the range ~ 0.

zeros

Quantity of cigarettes demanded is affected only by price.

Changes in cigarette potency are ignored
Immediate implementation

04 to +0.04 are shown as

Percent changes in cigarette production costs: decreased circumference - 3%; decreased density - 1%; chemical! additive + 2%,
increased paper weight + 1%; decreased paper porosity 0%.


Table 5.14 impacts of increasing Cigarette Paper Weight from 24 to 32 Grams

per Square Meter: Summary

Four-Year Grace Period _

Immediate Implementation

Change in Change in Change in Change in
Impacts Amount Percent _Amount _ Percent
| First-Order Impacts
Fire*
Lives saved OR 4,300 75.0 8,500 75.0
Life-years gained 58,000 75.0 115,000 75.0
Injuries avoided 19,700 75.0 38,700 75.0
Property loss avoided (mill.$) 1,300 75.0 2,500 75.0
Second-Order Impacts
Tobacco Farming”
Tobacco price ($/lb.) 0 i} 0 0.1
Domestic sales (mill.lbs.) ~1 -O41 -1 -04
Tobacco revenue (mill.$) ~1 ~0.1 -1 -04
Cigarette Industry”
Cigarette price ($/1000) 0.16 0.5 0.16 0.5
Domestic sales (mill.cig.) —750 -1.0 ~ 820 -01
Cigarette revenue (mill.$) 65 04 70 0.4
Tax and Consumer”
Fed. Excise Tax Rev. (mill.$) ~6 -O1 -7 -01
Consumer Surplus (mill.$) -85 -90
Health*
Medical costs (mill.$) ~60 ~75 i)
Life-years (PV yrs.) 32,600 41,000
Employment,
Tobacco Sector (FT equiv.jobs) -15 -15
Cigarette Sector (FT equiv.jobs) 5 5 ie}
Other (FT equiv.jobs) 390 425

(a) All fire impacts (10-year period) and health impacts (lifetime) are given in present values at a 5% discount rate; fire loss
savings assume a 75 percent reduction in the probability of ignition.

(b) Reported for one year only (the first year impact occurs).

consumers like the modified cigarettes just as well as
existing cigarettes, that is, that there is no change in
demand. If consumer demand for the modified cigarettes
were lower than for existing cigarettes, due, for example, to
a less pleasing taste, fire loss savings would be slightly
higher. Tobacco farming impacts would be somewhat more
negative due to a further reduction in the derived demand
for tobacco. Cigarette industry effects would also be nega-
tive. Reduced smoking due to the lower demand would
lower present value medical costs and increase life expec-
tancy. The generally negative employment impacts of the
modification would worsen.

The last two columns of the table show the results

38

assuming immediate implementation of the modification. As
would be expected, fire loss savings are greater than with
the delayed implementation because savings are tallied over
more years of the 10-year study period. For similar reasons,
health impacts are greater. The other impacts differ only to
the extent the baseline data for 1986 are larger in value
than those for 1990.

5.3.2 Increased Use of Expanded Tobacco

As was shown in table 5.2, increased use of expanded
tobacco~like decreased cigarette circumference —is esti


the order of magnitude of impacts which might result from
representative modifications to cigarettes.

The five modifications are estimated to cause only small
percentage changes in the supply price of cigarettes. Two
of them are estimated to entail a small reduction in the
cost of producing cigarettes; two, a small increase in
production costs; and, one, to be approximately neutral in
its cost consequences,

Several of the modifications are estimated to have a
significant direct effect on the raw materials, labor, and
production processes for manufacturing cigarettes. Two of
the modifications are estimated to require substantially
less tobacco, but one of these is estimated to require
more expandable tobacco than existing cigarettes. One of
the modifications is estimated to require increased use of
expansion processing. One is estimated to require a
chemical additive. One is estimated to require consider-
ably more paper. And all are estimated to require
machinery adjustments and/or machinery and equipment
replacements, possible downtime and lost production, and
process changes.

The effects of the five hypothetical modifications on
consumer demand and on health from possible changes
in cigarette potency are unknown, and are treated in the
study only in the context of sensitivity analysis. Potentially,
consumer demand and direct health effects could be
important. The impact model is capable of taking these
effects into account, if reliable data are available.

For each of the five modifications, the table on page xiii
summarizes analysis results, based on assumptions listed
at the bottom of the table. Principal observations to note
from the table are the following

— Identical estimates of first-order impacts (based on the
assumption of 75 percent reductions in cigarette-fire
iosses) are shown for each modification in lieu of
laboratory-based performance data. As performance
results become available, these first-order impacts should
be adjusted accordingly.

— Cigarette production cost changes in the range of
—3% to +2% drive the second-order impacts shown in
the table. Changes in cigarette potency are ignored, as
well as non-price changes, such as taste, which may
influence the demand for cigarettes.

Decreased circumference is estimated to lower produc-
tion costs by about 3 percent, principally through lower
tobacco content in cigarettes. The resulting impacts are
estimated to be a 15 percent reduction in annual revenue
from tobacco farming, a 3 percent reduction in annual
cigarette industry revenue, a 1 percent increase in annual
federal excise tax revenue, a one percent increase in life
time smoking-related health costs, a 4 percent reduction
in full-time equivalent tobacco-industry jobs, and an
annual increase in consumer satisfaction (due to the esti-
mated lower price) of $660 million.

— Reducing the tobacco density in the cigarette is esti-
mated to lower production costs by about 1 percent, as
lower tobacco requirements are estimated to more than
offset higher processing costs. The resulting impacts are
estimated to be a 6 percent reduction in annual farm
revenue; a 1 percent or less reduction in annual cigarette

vill

industry revenue, annual federal excise tax revenue, and
full-time equivalent employment; a less than 1 percent
increase in lifetime smoking-related health costs; and a
$290 million annual increase in consumer satisfaction.

— Adding a chemicai to the blend to cause self-
extinguishment is estimated to increase production costs
by about 2 percent. (This, of course, would vary
depending on the chemical selected for study.) The
resulting impacts are reductions of 1 percent or less in
annual farm income, annual federal excise tax revenue.
lifetime health costs, and full-time equivalent jobs; a 2
percent increase in cigarette industry revenue; and an
annual loss in consumer surplus of $380 million.

~ Changing the paper, either by increasing weight or by
decreasing porosity, is estimated to have little impact in
the second-order impact categories shown, because
paper constitutes a very small percentage of the total cost
of a cigarette. However, increasing the paper weight would
be expected to have impact on the paper industry, an
industry impact outside the scope of the study.

— When second-order impacts are limited to those driven
by changes in production costs (potency changes and
possible shifts in consumer demand are ignored), the
modification having the largest estimated second-order
impacts is decreasing cigarette circumference (15%
reduction in tobacco farm revenue and 4% reduction in
tobacco-industry employment), and the modification with
the smallest impact is decreasing paper porosity (no
impact within the categories included).

— Changes in lifetime smoking-related health costs esti-
mated to result from decreasing the production cost of
cigarettes are no more than 1 percent of the base. But,
because the estimated base is very large, a one percent
change translates into about $600 million in lifetime
medical costs and 300 thousand life years (present value
dollars and years discounted at 5%). [For perspective, a
75% reduction in cigarette fire deaths is estimated to save
about one-half this number of life years over a 10-year
period.]

— The small percentage changes in cigarette supply
prices are estimated to cause relatively small second-
order impacts in terms of percentage changes in base
numbers; in absolute terms, however, some impacts
appear large.

Not shown in the table are possible impacts resulting from
changes in cigarette potency attributable to cigarette
design modifications. Potency changes may change
health risk exposure. Because changes in exposure apply
to ail modified cigarettes (not just to the change in
consumption), changes in potency have large potential
health impacts. Increases in potency may increase health
costs; decreases in potency may decrease health costs.
Inadequate data on the relationship between changes in
the chemical composition of cigarettes and health risk
exposure prevented quantitative estimation of this impact,
beyond sensitivity testing. The model, however, has the
capability of treating potency changes 'f data become
available.

Also not shown in the table are impacts estimated to
result from shifts in the level of consumer demand due to


Table 5.7 Data Used in the Health
Impact Model: Number of Smokers by
Age, Sex, and Smoking Level

Rae ERRNO
Age/Sex Smoking Level
Group Light Moderate Heavy
Men
25-29 1,666,782 1,834,197 269,638
30-34 1,249,581 1,765,457 639,926
35-39 925,225 1,623,575 594,598
40-44 606,222 1,308,461 505,850
45-49 516,630 1,108,678 421,240
50-54 396,307 866,801 381,493
55-59 418,716 954,575 349,154
60-64 455,495 694,539 351,124
65-69 304,998 412,931 185,628
70-74 288,958 300,528 60,201
75-791 66,055 85,783 40,982
Women
25-29 1,698,120 1,613,576 185,879
30-34 1,352,630 1,418,967 280,645
35-39 1,055,831 1,238,938 359,603
40-44 852,849 1,131,875 324,219
45-49 695,662 1,014,416 275,589
Hl 50-54 676,394 870,198 162,463
55-59 708,978 897,446 159,714
60-64 625,800 662,476 83,405
65-69 450,579 464,475 53,438
70-74 381,295 268,673 18,807
75-79 178,298 126,428 19,962
NOTE: Smoking levels are defined as follows: light smoking,

1-19 cigarettes per day; moderate smoking. 20-39
cigarettes per day; and heavy smoking, 40 +
cigarettes per day.

domestic wholesale market and is included in the wholesale
price. State and local cigarette taxes are levied after the
manufacturer sells to the distributor and are not included in
the wholesale price. Because the supply and demand
model is based on the wholesale market for cigarettes, only
the federal taxes are included explicitly in the analysis.
Although state tax rates vary widely, the total revenue
currently collected by all the states combined is almost iden
tical to federal collections because the weighted average
state tax rate is 16.2 cents per package, ®” just slightly
higher than the 16 cents per package implied by the federal
tax rate of eight dollars per 1000. Local (municipal and
county) cigarette tax revenue currently is about 5 percent of

37The Tobacco Institute, The Tax Burden on Tobacco: Historical Compr:
lation, vol 21 (1986), (Washington DC: The Tobacco Institute), p. 204

32

Table 5.8 Health Impact Model: Results

Moaleh Unpacte Per Ctgarecte

Ute tapectaccy
(Oitte-yeare)

Diacoune

lag
Rate (X)— Spectfieatton Coats ($)

° no lag 97 0.14
° no lag 1199 0.097
° deyes tag -189 40.109
° f-yes dag Aneveaue 96 -0.09%
5 0 lag decresse ote 40.025
5 0 Lag sae He 0.022
5 feyrs lag dee “7 40.020
5 deyes tag +0 -0.019

generated by modificatton-induced etgarette
fh tmpacta due to posable cha

included. Route tadicate per

Tek per jaing per cigarette inpacte based on cigarectes
euoked by 25-t0 79-year-olde oaly-

the size of federal excise tax revenue.** Thus, a rough esti
mate of the impact on federal, state, and local cigarette
taxes combined could be obtained by multiplying the
federal excise tax impact reported in the table by a factor of
2.05

The second impact in this fourth category is Consumers’
Surplus, which is a measure of the difference between what
consumers are willing to pay for a product and what they
are required to pay. Cigarette modifications can affect
consumers’ willingness to pay through changes in taste or
convenience, or what they are required to pay through
changes in production costs. In these impact analyses,
Consumers’ Surplus takes into account estimated changes in
production costs, together with alternative assumptions
regarding changes in demand.

The fifth impact category covers the effects on medical
costs and years of life expectancy associated with changes
in cigarette consumption. These impacts are derived by
tracing the modification-induced changes in cigarette
production costs and shifts in the demand for cigarettes
through the economic model to arrive at changes in ciga-
rette consumption. Changes in cigarette consumption are
then linked to health data that relate rates of daily cigarette
consumption to the two categories of cigarette health
damage included in the study: medical care costs and
losses in life expectancy. Changes in medical care costs are
stated in millions of dollars and changes in life expectancy
are stated in years of life. Both health care damage vari
ables are stated in present value terms discounted at zero
and five percent over the life of the consumer.

The last impact category: covers the employment impacts
of the cigarette modifications. There are six economic
sectors related to cigarette production that could be affected

38The Tobacco Institute, The Tax Burden on Tobacco, table 1, p. 4.


that consumers may make implicitly, whether or not they are
aware of them. These include such nonmarket costs as
health and fire risks.

Implicit in the consumers’ surplus concept is the assump-
tion that tastes and preferences of consumers are revealed
by their consumption decisions, and that consumption
provides satisfaction to the consumer. The application of the
consumers surplus measure assumes free choice and the
absence of third party or external effects. To the extent that
physiological and social dependencies prevent the smoker
from making free choices about consumption, there is a
market failure, and consumers surplus becomes a question-
able indicator of consumer satisfaction. Similarly, if passive
smokers who wish not to inhale environmental smoke suffer
a decrease in consumer satisfaction as active smokers
experience a gain, and vice versa, it becomes a question-
able measure.

Employment Impacts

Employment impacts will be induced directly if the input
requirements for producing cigarettes change, thereby
changing the mix and numbers of jobs. Indirect employment
impacts may result if a design modification triggers a
change in cigarette or tobacco sales.

Employment impacts are likely to be concentrated in the
mayor tobacco-producing and cigarette-manufacturing
regions. But the impact assessment in section 5 does not
estimate impacts by region

To the extent that displaced workers can move into other
jobs at equal wages, employment losses will be offset. But if
wages are lower in alternative employment opportunities or if
displaced workers cannot find alternative employment,
losses in worker income will persist.

Employment impacts estimated by the economic impact
model include the direct impacts resulting from changes in
the cigarette production process as well as indirect impacts
resulting from changes in the level of tobacco and cigarette
production. The employment impacts are measured in full-
time equivalent jobs.

Cigarette Excise Tax Revenue Impacts

Included in the wholesale price of cigarettes to be sold in
the domestic market is the federal excise tax of 8 dollars per
thousand. In addition, included in the retail price of
cigarettes are state and local taxes which vary widely but on
a sales-weighted average basis amount to just under 17
cents per package of 20 cigarettes, approximately equal to
the revenue collected under the federal tax. Because these
excise taxes are based on the quantity of cigarettes sold, the
revenue generated by them will be affected directly in
proportion to changes in domestic cigarette sales. These tax
revenue impacts are included in the model and are to be
interpreted as changes in transfer payments between
different interest groups and not as impacts on resource
costs. Federal excise tax is imposed on the basis of the
quantity of cigarettes sold. Tax revenue, therefore, can be
expected to rise if a design modification results in higher
sales of cigarettes, and to fall with lower sales.

Other Impacts
Potential impacts not included in the model include the
following

(1) Other industry impacts, such as impacts on the paper,
fertilizer, container, farm equipment, cigarette manufac-
turing equipment, chemical, transportation, and adver-
tising and promotion industries;

(2) Multiplier impacts as each effect causes, in turn, still
smaller effects in a ripple throughout the economy;

(3) Global impacts, such as public satisfaction that innocent
people are suffering fewer losses from smoking-related
fires for which they are not responsible;

(4) Regional impacts, as some of the major impacts, namely
tobacco farming, cigarette manufacturing, and employ-
ment, will tend to be concentrated in several states.




Contents

Acknowledgments

List of Tables .

Executive Summary

1.0 Introduction

1.1. Background

1.2 Purpose and Organization

1.3. Technical Approach and Scope of
Study ....... seve

2.0 Cigarette Modifications . .

2.1 Five Hypothetical Cigarette Mod cations

2.2 The Baseline Cigarette

3.0 Potential impacts

3.1. Sources of Impact

3.2 Types of Impact . .

3.2.1 First-Order Impacts: Reductions in

Cigarette-Fire Losses .
3.2.2 Second-Order Impacts

4.0 The Economic Impact Model ...........

4.1. The Supply and Demand Equilibrium
Model
4.1.1 Model Structure: Structural “Equati ‘ons,
Endogenous and Exogenous Variables,
Parameters, and Solution Equations
4.1.2 Data Requirements for the Supply and
Demand Model .............-.5- :
4.1.3. Immediate Impacts Provided by the
Supply and Demand Model
4.2 Fire Loss Impacts .
4.2.1 Fire Loss Data Requirements .
4.2.2 Projection of Baseline Annual Cigarette

Consumption cee

4.2.3. Fire Loss Impact Model and Linkage to
the Supply and Demand Model

4.3 Health Impact Model

4.3.1 Data Considerations

4.3.2 Requirements of the Model

4.3.3 Eight-Step Modeling Procedure .

4.3.4 Linkage to the Supply and Demand
Model .

4.4 Employment Impacts

15

. 16
16

17

17

18
18

18
20
20

22
23

441 Data Requirements for Employment
Impacts .
4.4.2 Employment Impact Model and Linkage
to the Supply and Demand Model

5.0 Impact Analysis Results for Five
Hypothetical Cigarette Design
Modifications vee
Data Used in the Impact ‘Analyses cet eee

1 Supporting Data Studies

.2 Data Used to Solve the Supply and

Demand Model

3 Fire Loss Data .

.4 Health Impact Data

5 Employment Data

Format of the Impact Analysis

Reports. ....

5.3 Results of the ‘Analysis

5.3.1 Decrease in Circumference .

5.3.2 Increased Use of Expanded Tobacco

5.3.3 Chemical Additive to Tobacco Blend .

5.3.4 Increased Paper Weight

5.3.5 Decreased Paper Porosity

5.4 Sensitivity of Results to Key

Assumptions Lees vee

5.4.1. Time Required (Grace Period) for
implementing the Design Modification
5.4.2 Length of the Study Period... .... .
5.4.3 Value of the Discount Rate .........
5.4.4 Change in the Demand for Modified |
Cigarettes
5.4.5 Change in Tar, Nicotine, and Carbon
Monoxide Content of Modified
Cigarettes .
5.5 Summary
References
Appendix A_ Derivation of the Solution Equa
tions for the Supply and
Demand Equilibrium Model
Appendix B Notation for the Health Impact
Model ..... eee
Appendix C Detailed Results ‘of the
Economic Impact Analysis

47

49

. 69


Table C.2
Modification:
Assumptions:

Cost Impacts (%):

Decrease Circumference from 25 to 21 millimeters

Four-year Grace Period, and 5.0% Decrease in Domestic Cigarette Demand

Tobacco Content = - 29.40

Change in Tar and Nicotine (%):

0.0

Paper Cost = ~ 16.00

Other Cost =

- 1.40

Year

25% Fewer Fires

50% Fewer Fires

75% Fewer Fires

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Number Prop

Life Number Prop Life Live Number Prop

Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss

1986 0 0 0 ie} 0 ie) (0) ie} 0 ie} (0) 0
1987 0 0 0 0 0 0 0 10) 0 0 0 0
1988 i) ie} te) 0 ie} ie} 0 0 ie} ie) 0 10)
1989 10) 0) ie) 0 te) ie) ¢) 0 0) 0 0 0
1990 407 12504 1863 123 757 23228 3460 228 1106 33953 5058 333
1991 395 12131 1816 121 734 22535 3374 225 1073 32939 4932 329
1992 384 11785 1772 «119 713 21893 3292 222 1043 32001 4812 324
1993 372 11428 1724 118 692 21230 3203 218 1011 31032 4681 319
1994 363 11153 1685 116 675 20718 3130 216 987 30283 4575 315
1995 352 10815 1634 114 655 20090 3035 212 957 29366 4436 310

PV Sum (0%): 2275 69816 10494 711 4225 129695 19494 1321 6176 189573 28494 1930

PV Sum (5%): 1590 21602 7330 496 2953 40128 13617 921 4316 58655 19904 1346

Second-Order impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.09 -5.8
Domestic Tobacco Sales Million Lbs ~214 ~ 26.0
Export Tobacco Sales Million Lbs 64 11.6
Total Tobacco Revenue Million $ — 332 ~16.1
Quota Lease Revenue Million $ 106 ~34.3
Producers’ Surplus Million $ —36 NA

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 ~1.14 -3.4
Domestic Cigarettes Sales Millions - 21209 -40
Export Cigarettes Sales Millions 943 1.6
Total Cigarette Revenue Million $ ~1114 -73
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ -170 -4.0
Consumers’ Surplus Million $ ~901 NA.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% — 8551 — 4928016
5% — 1648 — 924229
Employment impacts by Sector (Change in Full-Time Equivalent Jobs):
2 Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL
Impact: ~ 5265 ~ 3958 —168 —438 — 1080 - 564 ~ 11747

61



Table 4.5 Equations Used to Compute
the Solution Values for the Endogenous
Variables, in the Order of Computeration

1. Price of Doaeatte Toba:

Bheg * FeatcalBedtEBed ~ nedBO) + U ~ Bea) (EDce - acert! ~ 6986)
+ Blegi/le + AI,
where 4 = BedtedFealBeanedFea + (1 ~ Bea)ncer(Fea ~ OElea)) + Beanca
+ = btadnce
2. Price of Doweattc Clgarecter: EPca = acabPedFea + EC
3. Price of Exported Cigarettes: Eee = ylEPeq ~ OEE ~ order aPlca)
4. Quantity of Domestic Cigarettes: Reg * ~ neabPed + Bea
5. Quanetty of Fxported Cigarettes: ce ~~ ncetPce + Dee
6. Guanctty of Total Cigarettes: Ec * BcdBed + (1 = Bcd Ece
Te quancity of Domestic Tobacco: EQeg  ~ sedBFee + EOCFea + Bea
8. Quantity of Exported Tobacco: Eee ~~ ntelPca

9. Quantity of Total U.S. Tobacco: Me = Brahed + (I~ GeadeQre = eePeg

USDA report, Tobacco: Outlook and Situation Report. The
share of modification costs not included in exported
cigarettes is a policy parameter whose value can be
selected between zero and one according to the preferred
assumption,

The next set of data requirements focuses on establishing
the proportional changes in each of the exogenous variables
listed in table 4.4, if a modification is expected to alter signifi-
cantly the taste of cigarettes, then the first two exogenous
variables can be used to reflect the resulting shifts in
demand in the domestic and export markets. The last three
exogenous variables address possible changes in the costs
of producing cigarettes due to the design modifications. The
data needed to specify these changes must be in propor-
tional change form and should be based on a study of the
cost consequences of the modification for each of the three
cost components. For example, if the modification calls for
increased use of tobacco expansion so that 12 percent less
tobacco would be used per cigarette, the value to be used
in the model for EUs should be —0.12. Similarly, if the
modification calls for an increase in the weight of paper
leading to a 25 percent increase in the cost of paper, then
the value of EK in the model should be 0.25.

Once the values for the parameters are fixed and the
values for the proportional change exogenous variables are
chosen, solution values for each of the endogenous vari-
ables can be obtained directly from the solution equations in
table 4.5. These solution values are stated in proportional
change form and represent impacts of the design modifica:
tions in terms of the changes in prices and quantities in the
domestic and export cigarette and tobacco markets. The

solution values also provide the means to estimate other
impacts of the madifications.

To determine the actual changes in the prices and quanti
ties (in addition to the proportional or percentage changes),
data are needed on the initial values for each of the vari-
ables, such as the total number of cigarettes and pounds of
tobacco produced, and the current prices of cigarettes and
tobacco. These initial or baseline values for the endogenous
variables are available in the USDA Tobacco: Outlook and
Situation Report.

4.1.3 Immediate Impacts Provided by the Supply and
Demand Model

The immediate impacts addressed by the supply and
demand model are the tobacco farming impacts, the ciga-
rette industry impacts, and the tax and consumer impacts.
These impacts are called immediate because their estima-
tion requires no data besides the three categories needed
by the supply and demand mode: itself: the values for the
parameters, the exogenous change variables, and the initial
values for the endogenous variables,

The tobacco farming impacts include changes in the price
of tobacco and changes in the quantities of tobacco sold in
the domestic and export markets. {n addition, the change in
tobacco revenue is computed with a breakout for the portion
of revenue going to the owners of the tobacco growing
rights, and the profits (Producers surplus) going to the
tobacco growers themselves.

The cigarette industry impacts include the change in the
wholesale cigarette price and the changes in domestic and
export sales. The change in total cigarette revenue from
domestic and export sales net of the federal excise tax is
also presented.

The tax and consumer impacts include the change in the
revenue from the federal excise tax and the change in
consumers surplus due both to shifts in demand and
changes in price and quantity.

Some of the immediate impacts discussed here are
represented by one of the solution equations of the model
already presented in table 4.5. The rest of the immediate
impacts are computed using the equations given in table
46,

4.2 Fire Loss Impacts

To enable the economic impact model to estimate fire loss
impacts of the cigarette modifications, three tasks are
involved. First, data need to be developed on the annual fire
loss rates projected over the study period and on the
change in ignition probability expected from the modifica:
tions. Second, baseline data projections are needed on
annual cigarette consumption over the study period. Third, a
model is needed for computing each of the fire loss impacts
based on these baseline data and on the results of the
supply and demand mode!. Each of these tasks will be
discussed in turn.


which cause greater complexity and often give rise to
difficulties both in theory and in practice.

The variety of concerns addressed by public program
analysis causes the accounting profitability approach of the
private company to be inadequate in most cases. For
example, effects such as air pollution, which may be external
to a private sector evaluation, are important factors to be
included in public decision analysis. Effects in one sector
may be offset to some extent by compensating effects in
other sectors. Beyond the direct and indirect effects of an
action, there may be important ‘global effects” to consider in
a public sector program decision that do not arise in the
analysis of private sector programs. Global effects reflect a
special societal perspective beyond the simple aggregation
of individual effects, such as public satisfaction that the
disadvantaged are cared for; they arise solely from peoples
knowledge that the impact exists.

As more impacts are considered, it becomes increasingly
difficult in practice to express all impacts in monetary units
acceptable to a body of decision makers.? Distribution
effects further complicate the analysis as some people,
groups, or sectors lose and some gain, and associated
questions of equity (fairness) arise. Even if all impact values
were to be commensurable (measurable in the same units,
such as dollars), and even if there were no problems of
overlapping effects which would cause double counting of
impacts, it would not be correct to aggregate all impact
measures in a public program analysis unless a clear set of
weights exists. As Thompson points out, when the analyst is
unsure of the relative importance the decision maker places
on different kinds of effects, a recommended approach is to
report estimates of the various impacts separately,
combining only those that are clearly commensurable.?

This study is characterized by multiple impacts, not all of
which can practically be valued in dollars. In addition, distri-
bution issues arise as some groups lose and some gain
from a given modification in cigarette design. Impacts are
analyzed by category, without aggregation across cate-
gories. Impacts are not aggregated for three major reasons:

(1) Different units of measure and different periods of
coverage;

(2) The fact that impacts in one segment might cause
compensating impacts in other segments, not fully
accounted for in the impact model; and

(3) The assumption that a unit change in impact in one
sector is not necessarily to be weighted equal to a unit
change in another sector.

Zin performing benefit-cost analysis, an attempt is usually made to
value impacts in dollars because this has the advantage of allowing
aiverse impacts to be compared, and a measure of overall impact
(e.g. net benefits or benefit/cost ratio) computed for each course of
action.

*Thompson, Benefit-Cost Analysis, p. 80.

It is left to the decision maker to make trade-offs among
the different impacts.

Other aspects of the technical approach are summarized
under applicable subheadings below:

Cigarettes Only: The study treats cigarettes only, omitting
little cigars which are also referenced in the legislation, for
two reasons: (1) cigarettes are by far the dominant smoking
material in smoking-related fires, and (2) data are more
readily available for cigarettes than for cigars. Omitting little
cigars from the study is consistent with the decision of the
TSG, and is expected to result in an insignificant understate-
ment of total impact

Cigarette Modifications: Related studies of cigarette igni-
tion propensity were carried out concurrently with the
economic impact assessment. Results of the studies of tech-
nical feasibility were not available until near the end of the
economic study. In order to carry out the economic impact
analysis, it was necessary to select hypothetical cigarette
design modifications for study without knowing their
predicted impacts on fire losses. Five modifications were
selected upon which to base the economic impact analysis,
using two criteria

(1) The hypothetical modifications were to be promising
methods of reducing ignition propensity; and

(2) Together the hypothetical modifications were to cover the
major physical descriptors of cigarettes - tobacco blend,
paper, and size.

Because the economic impact model is designed to address
all of these aspects of cigarettes, it is sufficiently flexible to
accommodate other modifications that might be proposed at
a later time.

Ignition Performance Results: In the absence of
completed laboratory analysis of the ignition propensity, the
economic impact analysis was performed based on three
alternative percentage reductions in fire losses: (1) 25
percent (2) SO percent and (3) 75 percent. This approach
provides benchmark levels of performance against which
performance estimates based on laboratory results can be
compared when they become available,

Types of Impacts and Sectors of the Economy Covered:
An objective of the study is to cover the more significant
impacts of the hypothetical modifications on designated
sectors of the economy. Of prime interest are the impacts on
the general public from having fewer smoking-related fires.
Also of interest are potential second-order impacts, such as
impacts on the cigarette industry from changes in produc-
tion costs and sales, on tobacco farmers from changes in
demand for leaf tobacco, on consumers from changes in
smoking, on workers from changes in employment opportu-
nities, and on the Federal government from changes in
excise tax revenue. There may impacts on other industries
not covered, such as the paper industry, chemical industry,
and machinery industry, but these are expected to be less


the number of people changing smoking status per
percentage price change, and then (2) converting people
changing smoking status to numbers of cigarettes by
applying the average number of cigarettes “smoked” per day
by a person changing smoking status (an average of
cigarettes per day per smoker and former cigarettes per day
per quitter). The total change in cigarette consumption per
percentage price change was simply the total price elasticity
times the total daily cigarette consumption. The resulting
quantity share expresses the proportion of the change in the
total number of cigarettes smoked accounted for by the
participation effect. The quantity share value for the
consumption effect is then determined as the residual
proportion.

Modified cigarettes may affect consumer demand through
changes in both cigarette price and in taste and other
smoking attributes. Consumption changes induced by taste
and other smoking attributes are also expected to have
participation and consumption effects. In the absence of
specific estimates of consumer response to changes in ciga-
rette taste and other attributes, the quantity shares described
above were used to apportion the consumer response to
taste and other smoking attribute changes between the
participation and consumption effects.

STEP 2: Model the Health Data

Participation Effect. The participation effect is defined as
changes in cigarette consumption due to changes in
smoking status. In the case of a decrease in cigarette
consumption, two sources could cause smoking status to be
different from what it otherwise would be. Current smokers
might quit (quitters), and nonsmokers who otherwise would
have begun smoking might not start (non-starters). Because
most non-starters are found in the younger age groups and
most databases do not report measurable effects for these
smokers, the health-related participation effect for a decrease
in cigarette consumption should be based mainly on current
smokers quitting.

Consumption Effect. The consumption effect is defined as
a change in the number of cigarettes smoked by smokers.
For a decrease in cigarette consumption, health data on the
benefits of quitting can be used to determine the value
gained by smokers lowering their consumption levels. Specif-
ically. in order to assign health impacts to reductions in
numbers of cigarettes smoked, dose-response curves should
be drawn using quitting benefits data, showing how health
impacts change as cigarette consumption decreases.?#

if health data distinguish among smoking levels, then
average consumption levels should be computed for each
level. Dose-response curves can then be drawn by interpola-
tion between each average consumption level. Once dose-
response curves are developed, slopes can be computed,
representing the health impacts per unit change in cigarette
consumption.

23G, Oster, GA. Colditz, and N.L. Kelly, ‘The Economic Costs of
Smoking and Benetits of Quitting for individual Smokers,” Preventive
Medicine, no. 13 (1984) pp. 377-389.

a1

STEP 3: Model the Smoking Demographics Data

The disaggregated health impacts developed in Step 2 had
to be combined to reflect weighted averages. This was done
by applying to the health impacts a system of weights,
based on current smoker demographics. Specifically, the
age, sex, and smoking-level specific health impacts were
weighted by the relative frequency of smokers of the
corresponding age groups, sexes, and smoking levels. The
sum of these weighted health impacts across all age groups,
sexes, and smoking levels provided the weighted average
health impact.

Use of this weighting system for the participation effect
assumes that quitters change their smoking status in the
same age, sex, and level proportions as smokers currently
smoke. One might speculate, however, that levels from which
smokers quit are substantially lower than levels at which
current smokers smoke, rendering the above assumption
quite restrictive. Analysis of the smoker demographics data,
however, revealed that, in 1985, smokers smoked on average
2087 cigarettes per day, and in 1983 (the latest year for
which these data were available), smokers who quit smoking
between 1978 and 1983 quit from an average 22.95
cigarette-per-day habit. The small disparity in these numbers
supports using current smoker demographics to create a
weighting system for generating average health impacts.

STEP 4: Combine the Quantity Shares and Weighted
Average Health Impacts

Steps 1-3 yield the following. (1) two quantity share values,
indicating the relative proportions of the change in the total
number of cigarettes smoked accounted for by the participa-
tion and consumption effects, (2) for the participation effect,
weighted average per capita health impacts from changing
smoking status, in dollars and life-years, and (3) for the
consumption effect, weighted average per cigarette health
impacts from changing the number of cigarettes smoked, in
dollars and life-years. The next step is to combine the health
impacts generated by the participation and consumption
effects to arrive at dollar-value and life-year estimates of
composite health impacts per cigarette. This is done by
converting participation effect health impacts to the same
“per cigarette’ basis used in the consumption effect, applying
each health impact to its corresponding quantity share, and
then summing the results.

Participation Effect. Before health impacts can be
summed, impacts for the participation effect, expressed on a
per capita basis, must be converted to a per cigarette basis.
This is done in two steps. First, an average number of
cigarettes ‘claimed’ to be smoked per person is applied to
the per capita health impacts. These cigarettes are “claimed”
to be smoked in the sense that they are based on smoker
survey data. Comparisons of survey data with cigarette sales
data indicate that smokers significantly underreport cigarette
consumption. The second step, then, was to apply an
“underreporting adjustment” to convert participation effect
health impacts from a per “claimed” cigarette basis to a per
“actual” cigarette basis.

The participation effect health impacts, now on a per ciga-
rette basis, are next scaled down by the participation effect




Table C. 24

Modification: Decrease Paper Porosity from 35 to 10 Coresta Units
Assumptions: Immediate Implementation, and a 5.0% Increase in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 0.00

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 353 10824 1591 98 788 24182 3555, 218 1223 37539 5518 339
1987 341 10453 1537 97 761 23351 3433 216 1181 36250 5329 335
1988 330 10127 1491 96 737 22623 3331 213 1144 35119 5171 331
1989 320 9832 1456 (95 716 21966 3254 at 1111 34099 5051 328
1990 310 9502 1415 93 692 21227 3162 208 1074 32952 4909 323
1991 300 9218 1380 92 671 20593 3084 206 1042 31968 4787 319
1992 292 ©8955 1347 91 652 20006 3008 203 1012 31058 4670 315
1993 283 8684 1310 89 632 19401 2927 200 981 30117 4543 310
1994 276 = 8475 1280 88 617 18932 2860 197 958 29390 4440 306
1995 268 «8218 1241 87 598 18359 2773 194 929 28500 4305 300

PV Sum (0%): 3072 94288 14049 925 6863 210640 31386 2066 10653 326992 48723 3207

PV Sum (5%): 2401 32631 10965 718 5364 72899 24497 1603 8327 113166 38028 2489

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb 0.02 14
Domestic Tobacco Sales Million Lbs 30 3.3
Export Tobacco Sales Million Lbs ~13 2.2
Total Tobacco Revenue Million $ 50 2.2
Quota Lease Revenue Million $ 25 7.3
Producers Surplus Million $ 4 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.03 0.1
Domestic Cigarettes Sales Millions 29006 5.0
Export Cigarettes Sales Millions — 198 -0.3
Total Cigarette Revenue Million $ 760 46
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 232 5.0
Consumers’ Surplus Million $ 1624 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 11760 - 5717630
5% 2831 — 1312350

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 584 3336 19 311 1535 771 6556

83



important and are beyond the scope of coverage of this
study. Changes in the costs of paper, chemical additives,
and machinery replacements resulting from cigarette modifi-
cations are taken into account in the impact calculations for
the cigarette industry.

Modeling: To allow quantitative estimation of economic
impacts, a mathematical economic impact model was devel
opec. It consists of a series of integrated modules which
represent each of the above sectors of the economy to be
studied. It is an equilibrium model in the sense that a stable
economic condition is assumed before and after the fire-
safety of cigarettes is changed. The availability of data was
taken into account in developing the model so that it could
be applied to produce quantitative estimates. Although the
model can be exercised with data different from that used in
‘he case examples, it requires that the same data structures
oe used. This model is the most comprehensive available for
estimating a wide variety of impacts that can result from
changes in cigarette design, production costs, and demand

Case Examples: Thirty separate analyses were performed
by executing the economic impact model with selected data
and assumptions. The results are intended to suggest the
order of magnitude of impacts under alternative conditions.
For conditions other than those specified, different results
would be obtained from the model

Data: Much of the data used in executing the economic
impact model for the case examples are from supporting
studies, performed by consultants engaged under separate
contract by the CPSC with approval by the TSG. These data
are presented and described in volumes 5 and 6 of the TSG
reports. The accuracy of these data has not been verified by
the National Bureau of Standards.

Period of Time Covered and Discounting: A question
that arises in performing an impact study is the period of
time to be covered. If measurable impacts are expected to
occur as one-time events, they can be stated as lump-sum
amounts. If they are expected to recur in approximately
uniform amounts annually, they can be measured for one
year and stated as annually recurring amounts. But if
impacts vary significantly over time, the time dimension over
which impacts are assessed becomes important.

Modifying cigarettes for fire safety entails impacts which
were expected to have a significant time dimension and one
that likely varies by type of impact. For example, the size of
the smoking-related fire problem was expected to change
over time even without a modification in cigarettes because
of changes in smoking habits, changes in the prevalence of
ignitable materials and changes in the level of fire protection.
A changing baseline of fire losses means that the fire-related
impacts from modifying cigarettes would be expected to
change each year. In contrast, the effect of a cigarette
modification on a given smoker's consumption rate or deci-
sion to start or stop smoking was expected to be a one-time
event, not a repeating one, although the consequences of
the behavior change would accrue over his or her remaining
lifetime.

Because the time dimension was expected to be signifi-
cant in computing fire-loss impacts, the model was struc-
tured to allow specification of a study period over which
fire-loss impacts would be assessed. For the case examples,
a study period of 10 years was specified to match the
period over which it was believed base-line changes could
be projected

A ten-year study period was also used in the case
examples to assess health impacts. At the time cigarettes are
modified, all smokers who would be expected to incur future
health effects from a change in smoking within the 10-year
study period, are accorded a one-time change in smoking,
with health consequences assessed over their remaining
lives.

Consumer impacts, cigarette industry impacts, tobacco
farming impacts, tax impacts, and employment impacts are
all reported only for the first year they are estimated to
occur. The extent to which they recur depends on alternative
opportunities and the mobility of resources ir the economy.

Another question which arises in performing the study is
what to assume regarding the timing of implementation and
the extent of the changeover. Two alternative implementation
times are assumed in the study: (1) immediate implementa
tion, and (2) a four-year delay. In either case, it is assumed
that both before and after the modification, cigarettes can be
described by a single, homogeneous design

Conventional practices of benefit-cost analyses are
followed, whereby future amounts are adjusted to their time
equivalent present value amounts; i.e., as though all future
amounts occurred immediately as a lump-sum amount. This
is necessary for a valid economic comparison of amounts
whch occur at different times.


Table C. 30
Modification:
Assumptions:
Cost Impacts (%):

Add Chemical to Tobacco Blend
Immediate Implementation, and a 5.0 % Increase in Domestic Cigarette Demand
Tobacco Content = 0.00

Paper Cost = 0.00

Other Cost = 2.83

U.S. GOVERNMENT PRINTING OFFICE :

Change in Tar and Nicotine (%): 0.0
First-Order Impacts:
Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided
Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 360 11046 1624 100 793 24330 3577 220 1225 37613 5529 340
1987 348 10667 1568 998 765 23494 3454 217 1183 36321 5340 335
1988 337 10334 1522 97 742 22761 3351 215 1146 35189 5181 332
1989 327 10034 1486 (97 720 22100 3274 213 1113 34166 5061 329
1990 316 9696 1444 95 696 21357 3181 209 1076 33017 4918 324
1991 306 9407 1409 94 675 20719 3102 207 1044 32031 4796 320
1992 298 9139 1374 93 656 20129 3027 204 1014 31119 4679 315
1993 289 8862 1337, 91 636 19519 2945 = 201 983 30176 4552 310
1994 282 ©8648 1307 90 621 19048 2878 198 959 29448 4449 307
1995 273-8387 1267-88 602 18472 2790 195 930 28557 4313 301

PV Sum (0%): 3135 96221 14337 944 6905 211929 31578 2078 10674 327636 48819 3213

PV Sum (5%): 2450 33300 11190 732 5397 73345 24647 1613 8344 113389 38103 2494

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco S/Lb 0.01 10
Domestic Tobacco Sales Million Los 27 2.9
Export Tobacco Sales Million Lbs 12 -2.0
Total Tobacco Revenue Million $ 44 2.0
Quota Lease Revenue Million $ 22 65
Producers’ Surplus Million $ 4 NLA.

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.68 2.0
Domestic Cigarettes Sales Millions 25618 44
Export Cigarettes Sales Millions -175 -0.3
Total Cigarette Revenue Million $ 1071 6.4
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 205 44
Consumers’ Surplus Million $ 1234 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 10386 ~ 5049719
5% 2501 ~ 1159046

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: 516 3112 17 400 1355 681 6080

89

1987 0 - 193-849


Table B.1 Notation for Health Impact Model

were
BQSa,s,1,i
BS$a,s,1,i
BQYa,s,1,i
BSYa,s,1,4

a

Symbol Definition

ays l,i Present value lifetime dollar health benefits of
quitting per person in age group a, sex s, smoking
level 1, and at discount rate 1.

SSa,s,1,1 Present value lifetime dollar health costs of smoking
per person in age group a, sex s, smoking level 1,
and at discount rate i.

QYa,s,1,4 Present value life~year health benefits of quitting
per person in age group a, sex s, smoking level 1,
and at discount rate i.

SYa,s,1,4 Present value life-year health costs of smoking per

person in age group a, sex s, smoking level 1, and at
discount rate i.

Single present worth factor, for discounting to the
present values occurring (35-y) or 4 years hence

at discount rate i.

Slope of the dollar-benefit dose-response curve for
quitting for age group a, sex s, smoking level 1, and
discount rate 1.

Slope of the dollar-cost dose-response curve for
smoking for age group a, sex s, smoking level 1, and
discount rate i.

Slope of the life-year benefit dose-response curve for
quitting for age group a, sex s, smoking level 1, and
discount rate i.

Slope of the life-year cost dose-response curve for
smoking for age group a, sex s, smoking level 1, and
discount rate i.

Smoking level number, where 1'=2 when l=1, 1'=3 when
1=2, and 1'=3 when 1=3.

57



Table C.4

Modification: Decrease Circumference from 25 to 21 millimeters
Assumptions: Immediate Implemeniation, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = - 29.40 Paper Cost = — 16.00 Other Cost = -1.40

Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 402 12341 1814 112 821 25192 3703 228 1239 38044 5593 344
1987 388 11917 1752 110 793 24327 3576 225 1197 36738 5401 339
1988 376 11545 1700 109 768 23569 3470 222 1160 35592 5240 336
1989 365 11210 1660 108 746 22884 3390 220 1126 34558 5119 333
1990 353 10833 1614 106 720 22114 3294 217 1088 33395 4975 328
1991 342 10509 1574 105 699 21454 3212 214 1056 32399 4851 323
1992 333 10210 1535 103 679 20843 3134 211 1025 31476 4733 319
1993 323 9901 1494 102 658 20212 3049 208 994 30522 4604 314
1994 315 9662 1460 101 643° 19724 2980 205 970 29786 4500 310
1995 305 9369 1415 99 623 19127 2889 ©6202 941 28884 4363 305
PV Sum (0%): 3502 107496 16017 1054 7149 219445 32698 2152 10797 331394 49379 3250

PV SumaBgs): 37202 12501 818 5588 75946 25521 1670 8439 114690 38540 2523

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $iLb -0.08 ~5.0
Domestic Tobacco Sales Million Lbs ~213 23.7
Export Tobacco Sales Million Lbs 60 10.0
Total Tobacco Revenue Million $ ~ 330 ~14.7
Quota Lease Revenue Million $ ~101 ~29.8
Producers’ Surplus Million $ -37 NA.

Cigarette Industry Impacts: UNITS Absolute Change % Change
Price of Cigarettes $/1000 -1.13 ~3.3
Domestic Cigarettes Sales Millions 5855 1.0
Export Cigarettes Sales Millions 892 1.4
Total Cigarette Revenue Million $ -499 -3.0
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ 47 1.0
Consumers’ Surplus Million $ 662 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% 2374 ~ 1154122
5% 572 — 264902
Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):
Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL
Impact: 5350 ~ 983 -174 - 167 359 156 ~ 6156



(1) Livesilife-years saved due to fewer cigarette fires;
(2) Cigarette-fire injuries avoided; and
(3) Property loss reductions.
B. Second-Order Impacts
(1) Cigarette industry impacts;
(2) Tobacco farming impacts;
(3) Health impacts;
(4) Consumers’ surplus impacts;
(5) Employment impacts;
(6) Excise tax revenue impacts; and
(7) Other impacts.

Each of these potential types of impacts is discussed briefly
below. The discussions address the appropriate units of valu
ation and key issues for measurement. Potential impacts not
included in the model are noted.

3.2.1. First-Order Impacts: Reductions in
Cigarette-Fire Losses

Reductions in fire losses fram smoking-related fires are the
most direct impacts of reducing cigarette ignition propensity.
If cigarettes were to be made completely fire safe, each year
about 1500 people fewer would die in fires, roughly 7000
fewer would be injured in fires, and nearly half a billion
dollars in property losses would be avoided. Some down
ward trend in cigarette fires is projected over the coming
years due to reductions in cigarette consumption, increases
in the prevalence of fire-resistant bedding and upholstery,
and improvements in fire mitigation technologies. Over the
next 10 years, for example, deaths and injuries from cigarette
fires are projected to drop by roughly 20 to 25 percent and
property loss by about 10 percent. Despite this downward
trend, the savings potential from fire-safe cigarettes remains
relatively strong through at least the mid-1990's.¢

The size of direct fire loss impacts depends not only on
the magnitude of the cigarette-fire problem, but on achiev-
able reductions in ignition propensity. As was indicated
earlier, no distinction is made among the hypothetical modifi-
cations in their estimated first-order impacts, due to lack of
data.

In addition to the direct fire loss impacts from a modifica-
tion in cigarette design, second-order fire-loss impacts may

‘John R Hall. Jr. Final Report: Expected Changes in Fire Damages
from Reducing Cigarette Ignition Propensity, report submitted to the
Technical Study Group on Cigarette Fire Safety, August 1986, Table
1

occur. The secondary impacts stem from changes in ciga-
rette consumption brought about by changes either in ciga-
rette production costs (supply) or in other cigarette attributes
(demand). While the direct fire-loss impacts are expected to
be positive for all technically feasible design modifications,
the secondary fire-loss impacts may be either positive or
negative depending on how cigarette production costs and
demand change.

The generally accepted unit for valuing property loss is
dollars and that is the unit of value applied in this study.
Property loss impacts are measured by applying designated
percentage reductions to the projected baseline of smoking:
related property losses, which are reported in dollars.

While there is little controversy over assigning a dollar unit
of value to property loss, there is controversy over assigning
a dollar unit of value to avoidance of death and injury. This
does not mean that dollar valuation of life and timb is not
often done—it is, generally according to one of the following
three methods.

(1) Willingness-to-pay method;
(2) Earnings method; and
(3) Social valuation method.§

Dollar valuation of life and limb is done because it is useful
for making decisions about programs that affect life safety,
such as disease control and highway safety — programs
which entail significant and varying amounts of capital
expenditure and which have different effects on life safety.
Even if dollar valuation is not made explicit, dollar values are
implicitly placed on lives each time the government or
private sector makes a capital investment decision which
affects the probability of death and injury. At the same time,
a number of arguments can be advanced against assigning
dollar values to life and limb, and the approach is nearly
always likely to cause difficulty as decision makers disagree
among themselves as to the appropriateness of the dollar
amount. At the request of the TSG, impacts on life and limb
are not valued in dollars in this study. They are measured in
terms of numbers of lives saved, with an alternative estimate
provided of the equivalent life-years saved (since no lives are
permanently saved), and numbers of injuries avoided.

The appropriate valuation of injury is particularly difficult,
because fire injuries range from very minor to a degree of
seriousness that would probably be perceived by many as
worse than death. Yet they are reported simply as number of
injuries in the fire statistics. In this study, direct injury impacts
are measured by applying the assumed percentage reduc-
tion in ignition propensity to the total number of smoking
related injuries, without any breakdown by seriousness of the
injury.

Indirect costs of fire losses, such as funeral bills, medical
expenses associated with fire injuries, expenses due to loss
of housing and clothing, and fire department costs and

5For a discussion of these methods of life valuation, see Thompson,
Benefit-Cost Analysis, pp. 184-220,


Rs @
4

Technical
Study Group
Cigarette Safety
Act of 1984


4. The Economic Impact Model

The purpose of the economic impact model is to permit
quantitative estimation of each of the impacts discussed in
section 3.0. Because most cigarette design modifications are
likely to lead to a change in manufacturing costs, a method
of tracing such cost changes through to all of the impact
categories is needed. This need led to the development of a
supply and demand equilibrium model of the leaf tobacco
and cigarette industries. This model lies at the core of the
impact model because the estimates it provides of the price
and quantity changes in the tobacco and cigarette markets
form an essential component of all of the impact estimates.
For example, the results of the supply and demand model
permit immediate estimation of such impacts as the changes
in tobacco growing revenue, cigarette company revenue,
and federal excise tax revenue. In addition, the estimate
given by the model of the change in the quantity of
cigarettes sold in the domestic market is the key value in
determining all of the second-order fire loss, health, and
employment impacts. The first subsection describes the
supply and demand equilibrium model, and the last three
subsections discuss the economic impact categories that
require additional modeling and that derive from both the
direct (that is, independent of a change in cigarette
consumption) effects of the product modifications and the
indirect (that is, resulting from a change in cigarettes
consumption) effects. Thus, there are a total of four models
that are linked together to comprise the economic impact
model

(1) Supply and demand equilibrium model:
(2) Fire loss impact model;
(3) Health impact model; and

(4) Employment impact model.

4.1. The Supply and Demand Equilibrium
Model

This subsection discusses the structure of the supply and

demand equilibrium model, the data requirements of the
model, and those economic impact categories that are
addressed directly by the model.

4.1.1 Model Structure: Structural Equations,
Endogenous and Exogenous Variables, Parameters, and
Solution Equations

The two major industries affected by modifications to the
design of cigarettes are the leaf tobacco industry and the
cigarette manufacturing industry, The supply and demand
equilibrium model is structured to address both of these
industries with explicit equations representing the supply of
and demand for tobacco and cigarettes in both the
domestic and export markets. The model is called an
equilibrium model because it is designed to compare the
market equilibrium values before and after the proposed
cigarette modifications. The model offers such comparisons
readily because all of the variables are expressed as propor-
tional changes and the solution of the model expresses
each of the price and quantity variables as a function of the
changes in tobacco costs, paper costs, and other manufac-
turing costs brought about by the cigarette modifications.

The supply and demand model consists of the nine equa-
tions presented in Table 4.1. The definitions of the
endogenous variables are presented in Table 4.2. The
Parameters used in the structural equations to compute the
immediate impacts of the supply and demand model are
explained in Table 4.3. The exogenous variables are defined
in Table 4.4. The operator, E, before a variable indicates that
the variable is in proportional change or log differential form
(.e., EX=dX/X). Thus, EPia means the log differential of the
price of domestic tobacco and when multiplied by 100, can
be interpreted as the percentage change in the price of
domestic tobacco.

Eq (1) is a standard demand equation which expresses
the proportional change in the number of cigarettes
demanded in the domestic market as a function of the
proportional change in the price of domestic cigarettes and
of the exogenous change in the demand, EDca, possibly due
to taste changes resulting from the modifications. Variables
such as the price of cigarette substitutes and consumer
incomes are not explicitly included in the model because
they are assumed to be unaffected by the modifications. The


5.4.4 Change in the Demand for Modified Cigarettes

The case analyses in appendix C were performed under the
following three conditions of demand for modified cigarettes:

(1) No change in demand;

(2) A 5 percent decrease in demand (e.g., due to an
undesirable taste change); and

A 5 percent increase in demand (e.g., due to an
improvement in cigarette taste, or an increase in
consumption to compensate for a decline in nicotine
content per cigarette)

Note that these alternative assumptions about demand are
all purely hypothetical in that no measurement of the
predicted change in demand for the five modifications of
cigarette design was performed. The comparative results,
however, indicate the sensitivity of the various impact cate-
gories to shifts in demand,

Consider first the sensitivity of results to a 5 percent
decline in demand for cigarettes. The analyses showed that
a decrease in the demand for modified cigarettes tends to
increase fire-ioss savings, increase farm losses, reduce ciga-
rette sales and industry revenue, reduce federal excise tax
revenue. reduce consumers’ surplus, reduce medical costs
and increase life-expectancy, and decrease employment.

Percentage changes in the various impact categories for
decreased circumference cigarettes, associated with a 5
percent decrease in demand, are as follows: fire-loss
savings increase by a matching 5 percent; losses in
tobacco farm sales and revenue are about 10 percent
greater; the estimated small increase in cigarette sales is
reversed, and industry revenue losses increase by more
than 200 percent; the small gain in federal excise tax
revenue is reversed and becomes a loss; the gain in
consumers’ surplus is also reversed; the increase in medical
costs is reversed and a decline results; the decline in life
years changes to a gain; tobacco-related employment
declines further.

Now consider the effect of an increase in demand of 5
percent. The analyses show that an increase in the demand
for cigarettes due to the modification tends to decrease fire
loss savings, decrease farm losses, increase cigarette sales
and industry revenue, increase federal excise tax revenue,
increase consumers’ surplus, increase medical costs and
decrease life expectancy, and offset employment losses. In
magnitude, the impacts are about the same as those
described for a decrease in demand; but, of course, the
direction of change is reversed.

lt may be concluded that the impact categories which are
particularly sensitive to the assumption about demand for
cigarettes are cigarette industry impacts, tax and consumer
impacts, health impacts, and employment impacts. Fire-loss
impacts and farm impacts are much less sensitive.

42

5.4.5 Change in Tar, Nicotine, and Carbon Monoxide
Content of Modified Cigarettes

A factor of critical importance is the potential health impacts
which may result from changing the chemical content of
cigarettes as a side effect of changing their design. A
change in chemical potency would affect ai! modified
cigarettes. Hence, the size of the impact could easily be
many times larger than health changes resulting from
changes in consumption levels of constant-potency
cigarettes, the only health impact included in the preceding
analyses. For example, a percentage change in cigarette
potency of approximately 10 percent that translated into a
similar percentage change in health-risk exposure, would
completely overwhelm health impacts resulting from a 1
percent change in production costs (holding potency
constant).

Insufficient data precluded estimating health impacts from
changes in chemical potency for the five hypothetical modifi-
cations. Tests with sample data, however, demonstrated the
potential importance of this impact. Furthermore, the model
has the capability of estimating the effect if sufficient data
were available.

5.5 Summary

Thirty different economic impact analyses, plus sensitivity
testing, were performed to assess what could be learned
about the likely effects of reducing the ignition propensity of
cigarettes. The analyses were based on five hypothetical
design modifications: tobacco blend, chemical additives,
cigarette size, and paper weight and porosity. Impacts
investigated included first-order impacts— savings from
having fewer cigarette fires --as well as seven potential
second-order impacts. Second-order impacts may result if
something other than cigarette ignition propensity is
changed. Other changes might occur in the mix or quantity
of raw materials, labor, and/or production processes for
manufacturing cigarettes; the cost of producing cigarettes;
and cigarette attributes such as taste, appearance, handling
characteristics, and chemical potency. Second-order
impacts, whether or not intended, may have an important
bearing on the outcome of an effort to improve fire safety,
and, therefore, should be taken into account in policy
development.

First, economic theory was applied to the problem to
identify potential areas of major concern. Second, an
economic impact model was developed to enable quantita-
tive estimation of those first- and second-order impacts
which were expected to be most significant. Third, assump-
tions were made and data were compiled or drawn from
supporting data studies for use in the economic impact
model. Fourth, the model was exercised with the data and
assumptions to generate results. Fifth, the results were
analyzed.

Despite uncertainties introduced into the analysis by the
need to make a number of assumptions and to use data to
which varying levels of confidence can be attached, the


Table C. 28

Modification: Add Chemical to Tobacco Blend

Assumptions: Immediate Implementation, and No Change in Domestic Cigarette Demand
Cost Impacts (%): Tobacco Content = 0.00 Paper Cost = 0.00 Other Cost = 2.83
Change in Tar and Nicotine (%): 0.0

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 422 12946 1903 117 834 25596 3763 231 1246 38246 5622 346
1987 407 12501 1838 115 805 24717 3634 228 1203 36933 5430 341
1988 395 12112 1783 114 780 23946 3526 226 1166 35781 5268 337
1989 383 11760 1742 113 757 23250 3444 224 1132 34741 5146 334
1980 370 11364 1693 111 732 22468 3347 220 1094 33573 5001 329
1991 359 11025 1651 110 710 21798 3264 218 1061 32570 4877 325
1992 349 10711 1611 109 690 21177 3184 215 1031 31643 4758 321
1993 338 10386 1567 107 669 20535 3098 2i1 1000 30684 4629 316
1994 330 10136 1531 106 653 20040 3028 209 976 29944 4524 312
1995 320 9829 1485 104 633 19433 2935, 205 946 29037 4386 306
PV Sum (0%): 3674 112769 16803 1106 7264 222960 33222 2186 10854 333152 49641 3267
PV Sum (5%): 2872 39027 13115 858 5678 77163 25930 1697 8484 115298 38745 2536

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco S/Lb ~ 0.00 -1.0
Domestic Tobacco Sales Million Lbs -4 -0.4
Export Tobacco Sales Million Lbs 2 03
Total Tobacco Revenue Million $ -6 ~03
Quota Lease Revenue Million $ -3 -08
Producers’ Surplus Million $ -0 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.65 1.9
Domestic Cigarettes Sales Millions — 3388 -0.6
Export Cigarettes Sales Millions 23 0.0
Total Cigarette Revenue Million $ 292 18
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ -27 ~0.6
Consumers’ Surplus Million $ - 380 N.A.

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% — 1364 785603
5% -304 170107
; Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):
Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL
Impact: -68 -225 ~2 89 ~179 ~90 ~ 476



5. Impact Analysis Results
for Five Hypothetical
Cigarette Design
Modifications

This section describes the results of the impact analyses that
were conducted for each of the five cigarette design modifi-
cations described in section 2: (1) reduced cigarette circum
ference from 25 mm to 21 mm; (2) increased use of
expanded tobacco; (3) chemical additive to the tobacco
blend; (4) increased paper weight from 24 to 32 grams per
square meter; and (5) decreased paper porosity from 35 to
10 Coresta units. For each modification, six impact analyses
were carried out. The six analyses resulted from the sensi-
tivity analysis with respect to two variables: shift in demand
due to the modification; and the date of implementation.
Three alternative assumptions regarding possible shifts in
demand due to changes in the taste or other performance
characteristics of the cigarettes were made: (1) no change;
(2) five percent increase; and (3) five percent decrease. Two
alternative assumptions were made with respect to the date
of implementation: (1) immediate implementation as of
January 1, 1986; and (2) delayed implementation until
January 1, 1990 with four years advance warning.
Combining the demand shift and the implementation alterna.
tives results in six cases for each of the five cigarette modifi
cations.

Section 5.1 summarizes the input data used in the impact
analyses. Then a sample impact analysis report is presented
and its format explained in section 5.2. Next, impact analysis
resuits for each of the five cigarette design modifications are
summarized and discussed in turn in section 53. The
saction concludes with a discussion of the sensitivity of
results to key assumptions and a summary of findings.

5.1 Data Used in the Impact Analyses

As indicated in section 4, the application of the economic
impact model requires a variety of data elements. This
subsection discusses the actual data that were used in
conducting the impact analyses. First, the consultants who
provided supporting data are listed and their principal areas
of contribution are identified. Second, the data used by the
supply and demand mode! are presented. Then, the data
used in the tire loss model, the health effects model, and the
employment mode! are presented,

25

5.1.1 Supporting Data Studies

The impact analyses required data from a number of
specialized subject areas. To help meet the extensive data
requirements, the Technical Study Group arranged for
consultants, under separate contracts, to perform supporting
studies. These supporting studies are included in Volumes 5
and 6 of the Technical Study Group reports, and are a major
source of data used in this report. The data are used in the
impact analysis at the direction of the Technical Study
Group; their accuracy have not been verified by the National
Bureau of Standards. Below is a listing of these consultants,
their respective areas of contribution, report titles, and
volume of the Technical Study Group reports in which the
work appears:

Fire Statistics — Dr John Hall, Jr, “Expected Changes in
Fire Damages from Reducing Cigarette Ignition Propensity”
Volume 5, Technical Study Group Reports.

Health Statistics - Dr. Gerry Oster, “Estimates of the
Economic and Noneconomic Health Consequences of
Smoking, Smoking Cessation, and Reduction in the Amount
Smoked,’ Volume 6, Technical Study Group Reports.

Industry Cost Data — Dr Armando Lago, “Cost Analysis of
Options for Self-Extinguishing Cigarettes’ Volume 6, Tech-
nical Study Group Reports.

Agricultural Data — Dr Daniel Sumner, “The Impact of Ciga
rette Modifications on the Tobacco Production Industry in the
United States” Volume 6, Technical Study Group Reports.

Consumer Response — Dr. Gary Ford and Dr. John Brown,
“The Costs and Benefits to Smokers of Reduced Flamma-
bility Cigarettes’ Volume 6, Technical Study Group Reports

Employment Data — Dr. David Greenberg, “The Employ-
ment Implications of Proposed Cigarette Design Modifica
tions to Reduce Cigarette Ignition Propensity” Volume 6,

Technical Study Group Reports.

It is indicated in the text following when data is drawn from
one of these supporting studies. The reader Is referred to


other costs of fire loss mitigation fall outside the scope of
study.

3.2.2 Second-Order impacts

Cigarette Industry Impacts

A change in cigarette design may affect manufacturers of
cigarettes by changing their manufacturing costs, product
price, sales volume, and revenue. These effects result from
changes in input requirements, causing a change in supply;
they can also result from shifts in the demand for the
cigarettes.

A reduction in ignition propensity may also change
manufacturers costs of litigation and reduce adverse
publicity. The product liability theory increasingly applied to
sustain law suits against cigarette manufacturers relates to
“defects in design’ and assumes that the manufacturer could
have eliminated foreseeable dangers from the product.6 By
producing fire-safe cigarettes, manufacturers may reduce
potential costs of litigation and adverse publicity arising from
cigarette-caused fires.

If a cigarette design modification requires an increase in
factors of production, unit costs rise, the price at which
manufacturers are willing to supply cigarettes rises, and
sales fall, other factors remaining the same. The resulting
change in revenue depends on the price elasticity of
demand for cigarettes, a measure of the responsiveness of
the change in the quantity of cigarettes purchased to a
change in cigarette price.” Given the relatively inelastic
demand for cigarettes—as indicated by previous studies® —
manufacturers’ revenue can be expected to increase with a
decrease in supply, and decrease with an increase in
supply, because the change in price will not be fully
compensated by a change in sales.

If a design modification changes those attributes of
cigarettes associated with smoking satisfaction, consumer
demand for the product also can be expected to change. A
cigarette perceived by consumers as inferior would be
expected to generate less demand and one perceived as
superior, more demand. Less demand tends to cause price
and cigarette sales to fall, and, in turn, to reduce manufac-
turers’ revenue. An increase in demand tends to have the
opposite effect. While it appears fairly certain that an inferior
tasting cigarette or one with obnoxious handling charac-
teristics would elicit reduced demand, and vice-versa, it is
not easy to say by how much. There is little publicly avail-
able information which would enable estimation of consumer

*Donaid W. Gamer, ‘Product Liability in Cigarette-caused Fires,” New
York State Journal of Medicine (July 1985), p. 322

’Algebraically, price elasticity is defined as the ratio of the percentage
change in the quantity demanded to the percentage change in the
price charged

"Eugene M. Lewit and Douglas Coate, “The Potential for Using Excise
Taxes to Reduce Smoking,” Journal of Health Economics, no. 1
(1982), pp. 121-145

response to the hypothetical modifications.®

Another factor which complicates the estimation of
demand-shift impacts on the cigarette industry is uncertainty
over the response in consurrer demand to cigarette modifi-
cations entailing changed levels of nicotine. As observed by
Leu and Schaub,

Cigarette smoking is associated with considerable physio-
logical and social dependency. .. The tenacity of smoking
patterns is explained by influences of the social environment,

by physiological processes, regulating the frequency of
smoking (and possible other intake parameters) within
Characteristic limits to maintain a certain nicotine level... ., or
both. . .1°

The social dependency factor is taken into account in the
economic impact model by the use of empirically estimated
price elasticity of demand parameters. The portion of the
physiological dependency factor which is satisfied by the
frequency of smoking (as distinct from changes in inhalation)
is taken into account in the economic impact model by
allowing shifts in the demand for cigarettes. But how much
to shift demand for a given change in nicotine is highly
questionable. It may be that a large part of the compensa-
tion occurs through changes in the manner cigarettes are
smoked, such as depth and length of inhalation, rather than
in purchases.

The impacts of design modifications on the cigarette
industry are measured as changes in millions of cigareties
sold and millions of dollars of revenue. These impacts are
reported for one year only, the first year they are assumed to
occur. Although the change in annual revenue in the ciga-
fette industry may recur, it would be expected that in the
long run unemployed resources will be deployed to other
uses.

To the extent that manufacturing fire-safe cigarettes were to
reduce future costs of litigation and adverse publicity, it
would give rise to positive cigarette industry impacts. These
impacts are not included in the quantitative impact assess-
ments of chapter 5.

Tobacco Farming Impacts

Modification of cigarettes can also be expected to affect
tobacco farming, because the demand for tobacco is
derived from cigarette sales. If a design modification causes
a shift in the supply or demand for cigarettes, the derived
demand for tobacco also can be expected to change. If a
shift in cigarette supply results from a change in non-
tobacco inputs only, the derived change in tobacco demand
will reflect a change only in the quantity of cigarettes sold;
but if the shift in supply results from a change in tobacco

°Gary T. Ford, John P. Brown, and John E. Calfee, “The Costs and
Benefits to Smokers of Reduced Flammability Cigarettes,” Report No
6, Technical Study Group.

*Robert E. Leu and Thomas Schaub, ‘Economic Aspects of Smoking."
Effective Health Care, vol. 2, no. 3 (1984).


(Case 3, Continued)

B. Life-Year Health Impacts

Participation Effect, Ages 35-79

9 2 3

HYy =WT35-79 * SPW4,; x QSP35-79 x UA/(CPD x NS35-79) x) ) ) NSa,s,1 * QYa,s,1,4

+WT31-34

+WT25~30

+WT35-79

+WT31-34

+WT25-30

x

x

x

x

x

a=l sel 1=1

Participation Effect, Ages 31-34

3422 °«3
SPW4,4 x QSP25~34 x UA/(CPD x NS31-34)x J} ) ) NSa,s,1 * QWa=1,s,1,i
y=31l s=1 1=1

Participation Effect, Ages 25-30
30 2 3

QSP25-34 x UA/(CPD x NS25~30) 2, SPHC35-y),4 on ae NSa,s,1 * SYa=1,s,1,i
y= e=1 12

Consumption Effect, Ages 35-79

9 2 3
SPW4,4 X QSC35~79/NS35-79 x) ) ]} NSa,s,1 * BQYa,s,1,1
a=l s=1 121

Consumption Effect, Ages 31-34

340¢«22«3
SPW4 4 * QSC25~34/NS31-34 x) ) _) NSa,s,1 * BQYa=1,s,1,1
y=31 s=] 1=1

Consumption Effect, Ages 25-30

30 2 3
QSC25~34/NS25-30 x ) SPW(35-y),4 )  ) NSa,s,1 * BSYarl,s,1,4
y=25 s=1 1=1


List of Tables

Table 2.1

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 5.1

Table 5.2

Table 5.3

Five Cigarette Modifications
Selected For Impact Assessment

Structural Equations of the
Supply and Demand Model in
Proportional Change Form

Definitions of Endogenous
Variables Used in the Supply and
Demand Model

Definitions of Parameters Used in
the Structural Equations and in the
Computation of the Immediate
impacts of the Supply and
Demand Model .......
Definitions of Exogenous Variables
Used in the Supply and Demand Model

Equations Used to Compute the
Solution Values for the Endogenous
Variables, in Order of Computation

Equations Used to Compute Immediate

Impacts of the Supply and Demand Model .

Actual and Projected Total and Per
Capita Consumption of Cigarettes

Definitions, Range, and Values of
Parameters Used in the Supply and
Demand Model .

Percentage Changes in Tobacco
Content, Paper Costs, and Other
Costs for Selected Cigarette Modifications

Definitions, Range, and Values of
Endogenous Variables Used in the
Supply and Demand Model

27

27

28

vi

Table 5.4 Baseline Data Used to Compute
Fire Loss Impacts (per Billion Cigarettes
Consumed) . a

Table 5.5 Health Data Used in the Health

Impact Model: Costs of Smoking
Table 5.6 Health Data Used in the Health
impact Model: Benefits of Quitting
Table 5.7 Data Used in the Health Impact
Model: Number of Smokers, ad Age,
Sex and Smoking Level .

Table 5.8 Health Impact Model: Results

Table 5.9 Data Used to Compute Direct
and Indirect Employment Effects

Table 5.10 Illustration of Impact Analysis
Reports Presented in Appendix C

Table 5.11 Impacts of Decreasing Cigarette
Circumference from 25 to 21
Millimeters: Summary

Table 5.12 Impacts of Increasing the Percentage
of Expanded Tobacco from 25 to 50
Percent: Summary oe

Table 5.13 Impacts of Addiag Chemical to
Tobacco Blend: Summary

Table 5.14 Impacts of Increas:ng Cigarette Paper
Weight from 24 to 32 Grams per
Square Meter: Summary

Table 5.15 Impacts of Decreasing Paper Porosity
from 35 to 10 Coresta Units: Summary

Table B.1 Notation for the Health Impact
Model sees

28

30

31

32

. 82

. 33

34

35

. 36

87

38

39


Table C. 26
Modification:
Assumptions:
Cost Impacts (%):

Change in Tar and Nicotine (%):

0.0

Add Chemical to Tobacco Blend
Four-year Grace Period, and a 5.0% Decrease in Domestic Cigarette Demand
Tobacco Content = 0.00

Paper Cost = 0.00

Other Cost = 2.83

First-Order Impacts:

Fire Impacts: Lives Saved (or Life Years Gained), Injuries Avoided,, and Property Losses (Million $) Avoided

Year 25% Fewer Fires 50% Fewer Fires 75% Fewer Fires
Life Number Prop Life Number Prop Live Number Prop
Lives Years Injured Loss Lives Years Injured Loss Lives Years Injured Loss
1986 ie} 0 ie} i} ie) 0 ie} 0 0 ie} ie) 0
1987 i} 0 0 0 0 0 te) 0 ie) (0) ie) 0
1988 0 0 (e) 0) 0 i} 0 ie} ie) ie} ie} ie}
1989 ie} 0 ie} ie} ie) ie} ie) 0 0 0 ie} ie}
1990 425 13032 1941 128 768 23580 3513 231 1112 34128 5084 335
1991 412 12643 1893 126 745 22876 3425 228 1079 33110 4958 331
1992 400 12282 1847 124 724 22224 3342 225 1048 32167 4837 326
1993 388 11910 1797 122 702 21551 3251 222 1016 31192 4705 321
1994 379 11623 1756 121 685 21031 3177 219 992 30440 4599 317
1995 367 (11271 1702 119 664 20395 3080 215 962 29518 4458 311

PV Sum (0%): 2371 72761 10936 741 4289 131658 19789 1341 6208 190555 28641 1940

PV Sum (6%): 1657 22513 7639 «517 2997 40736 13823 935 4338 58959 20007 1353

Second-Order Impacts:

Tobacco Farming Impacts: Units Absolute Change % Change
Price of Tobacco $/Lb ~ 0.02 —12
Domestic Tobacco Sales Million Lbs -31 ~3.7
Export Tobacco Sales Million Lbs 14 25
Total Tobacco Revenue Million $ -51 ~25
Quota Lease Revenue Million $ —25 ~8.0
Producers’ Surplus Million $ -4 NA

Cigarette Industry Impacts: Units Absolute Change % Change
Price of Cigarettes $/1000 0.63 1.9
Domestic Cigarettes Sales Millions ~ 29590 -5.6
Export Cigarettes Sales Millions 202 0.3
Total Cigarette Revenue Million $ ~ 443 ~29
(Net of Federal Excise Tax)

Tax & Consumer Impacts: Unit Absolute Change % Change
Federal Excise Tax Revenue Million $ ~ 237 ~5.6
Consumers’ Surplus Million $ - 1822 NA

Health Impacts:

Discount Rate Change in Medical Costs Change in Expected Life

(PV 1986 Million $) (PV Years)
0% - 11930 6875395
5% — 2299 1289451

Employment Impacts by Sector (Change in Full-Time Equivalent Jobs):

Sector: Tobacco Cigarette Warehouse Support Wholesale Retail TOTAL

Impact: ~ 596 ~ 3253 19 — 203 ~ 1566 ~ 787 - 6423

85



Table 5.5 Health Date Used in the Health Impact Model: Costs of Smoking

Additional Expected Lifetime Medical Care Costs for Reductions in Years
the Treatment of Smoking-Related Diseases (1986$) of Life Expectancy
Discounted at 0 Percent — Discounted at 5 Percent Discounted at 0 Percent Discounted at 5 Percent
Age/Sex Smoking Level Smoking Level Smoking Level Smoking Level
Group ‘Light Moderate Heavy Tight Moderate Heavy Light Moderate Heavy Light Moderate Heavy
Men
35-39 6,305 10,785 16,944 1,332 2,278 3,579 4.69 6.58 8.16 1,01 1.39 1.74
40-44 6,209 10,590 16,502 1,594 2,718 4,236 4.51 6.35 7,88 1.19 1,63 2.03
45-49 6,006 10,167, «15,700 1,844 3,122 4,821 «4.20 5.96 7.41 1,31 1.83 2.28
50-54 5,612, 9,360 14,235 2,014 3,359 5,108) 3.77 5.43, 6.80 1.38 1.95 2.45
55-59 5,154 8,479 12,727 2,154 3,543 5,318 = 326 4B 6.07 1,39 2,01 2.55
60-64 4,612 7,483 «11,139 2,227 3,614 = 5,379 2.69 4.10 5.24 1.33 1.98 2.54
65-69 3,980 6,374 9,462 2,180 3,493 5,184 2.07 3.34 4.35 1.17 1.83 2.39
70-74 3,226 5,158 7,684 1,989 3,180 4,738 1.41 2.53 3.40 0.91 1.56 2.10
75-79 2,383 3,798 5,699 1,629 2,596 3,896 0.82 1.77 2.52 0.59 1.21 1.72
Women
35-39 3,187 5,774 12,063 574 1,039 2,171 2.04 3.89 5.45 0.41 0.70 0.97
40-44 3,138 = 5,621 11,320 698 1,251 2,519 2.01 3.82 5.34 0.50 0.85 1.17
45-49 3,204 5,745 11,279 859 1,539 3,022, «1.87 3.62 5.09 0.56 0.97 1.33
50-54 3,081 5,512 10, 832 981 1,755 3,449 1.68 = 3.36 4.76 0.61 1.07 1.48
55-59 2,924 5,201 10,267, 1,100 1,957 3,863 144 3,03 4.35 0.62 1.14 1.60
60-64 2,720 4,771 9,501 1,195 2,096 4,175 1.15 2.64 3,86 0.59 1.16 1.66
65-69 2,401 4, 156 8,371 1,234 2,135 4,301 (0.82218 3.29 0.50 1.12 1.64
70-74 1,872 3,208 6,561 1,086 1,862 3,807 0.39 1.62 2.60 0.31 0.94 1.48
75-79 1,365 2,325 4,802 893 1,521 3,141 -0.01 1,07 1.92 0.07 0.70 1.22
Note: Smoking levels are defined as follows: ight smoking, 1-19 cigarettes per day; moderate smoking, 20-39
cigarettes per day; and heavy smoking, 40+ cigarettes per day.
Source: Report from Dr. Gerry Oster to Mr. Colin Church, Estimates of the Economic and Noneconomic Health
Consequences of Smoking, Swoking Cessation, and Reductions in the Amount Smoked, December 12, 1986.
This report wae based on earlier work repotted in Oster, Colditz, and Kelly, “The Economic Costs of
Smoking and Benefits of Quitting for Individual Smokers,” Preventive Medicine, No. 13, 1984,
pp- 377-389 and Oster, Huse, Delea, and Colditz, "Cost-£ffectiveness of Nicotine Gum as an Adjunct
to Physician's Advice Against Cigarette Smoking,” Journal of the American Medical Association,
No. 256, 1986, pp. 1315-1318.

consider the following example. Suppose we wish to choose
the most cost-effective of two public health programs, A and
B. Program A costs $10,000 today and saves one life

today, and Program B costs $10,000 today and saves one
life in 40 years.

Applying discounting techniques to the problem would tell
us that $10,000 today is equivalent to spending $70,000
(constant dollars) in 40 years (using a 5% discount rate and
assuming no price inflation or deflation). This would produce
a time consistent cost-per-life-saved ratio of $70,000/1 =
70000. Alternatively, applying discounting techniques would
tell us that saving a life in 40 years is time equivalent to
saving 1/7 life today (also using a 5% discount rate), again
producing a time consistent cost-per-life-saved ratio of
70000 (i.e., $10,000/ 1/7 = 70000). In comparison, main-
taining a consistent time relationship between dollars and
jives for Program A would result in a cost-per-life-saved ratio
of $10,000/1 = 10000. Thus applying principles of time
adjustment to the analysis would demonstrate that Program

30

A costs less per life saved, and, hence, is preferred on
economic grounds.

In contrast, assigning equal value to a life regardless of
when it occurs means that if it is worth spending $70,000
(constant dollars) in year 40 to save a life, it is worth
spending $70,000 (constant dollars) in year 1 to save a life.
And if it is worth spending $10,000 (constant dollars) in year
1 to save a life, it is worth spending $10,000 (constant
dollars) in year 40 to save a life. Yet why should we spend
$70,000 in year 1 to save a life when we could save the life
with an expenditure of only $10,000, leaving funds for addi-
tional life-saving or other activities? Failure to discount would
lead to the false conclusion that the two health programs
were of equal cost effectiveness. **

36For further discussion of the reason for discounting future life years
see Milton C. Weinstein and William B. Stason, “Foundations of Cost
Effectiveness Analysis for Health and Medical Practices,” The New
England Journal of Medicine (March 1977) p. 720.



Table 5.9 Data Used to Compute Direct and Indirect Employment Effects.

. SECTOR Tobacco Cigarettes Warehouse Support Wholesale Retail
BASELINE EMPLOYMENT
(FT Equivalent Jobs) 35,000 50,000 1,400 7,000 34,500 31,000
DIRECT EFFECTS
(FT Equivalent Jobs)
Decrease Circumference 0 6000 x EU.
id ie) — 240 ie) ie}
Increase % Expanded Tobacco ie} i} i} i} ie} ie}
Increase Paper Weight ie} + 1000 +500 0 0
Decrease Paper Porosity ie} 0 ie) 10) 0 0
Add Chemical (e) +165 0) +125 0 0
INDIRECT EFFECTS,
Employment Elasticities 1.5 1.5 1.2 1.0 1.0 05
with respect to Eat EQc Eat EQc EQc EQcd

NOTATION: EUra

proportional change in domestic tobacco content per cigarette

EQ, = proportional change in quantity of tobacco
EQ. proportional change in quantity of cigarette sales
EQca = proportional change in quantity of domestic cigarette sales

SOURCE: Source:

David Greenberg, “The Employment Implications of Proposed Cigarette Design Modifications to Reduce

Cigarette Ignition Propensity,” Report No. 6, Technical Study Group.

by the product modifications. These are: tobacco farming,
cigarette manufacturing; tobacco warehousing; support
industries such as utilities, paper, and flavorings; wholesale
distribution; and retail distribution including vending
machines. For each of these economic sectors the esti-
mated impact of the modification is stated in terms of the
change in the number of full-time equivalent jobs. The total
employment impact for all sectors combined is also
presented. In interpreting these employment impacts, one
should note that significant part-time employment in some of
these sectors, especially tobacco farming, means that the
number of persons affected by the modification is greater
than reflected in the full-time equivalent estimate.

5.3 Results of the Analysis

The results of the impact analyses presented in full detail in
appendix C are summarized in this subsection. Here the six
impact analyses for each particular modification have been

33

consolidated into a single table. These are presented below
for each modification in tables 5.11 through 5.15. The first is
discussed in greater detail to provide a framework for
understanding the others. The fire loss impacts presented in
these five tables all assume a 75 percent reduction in igni-
tion propensity.

5.3.1 Decrease in Circumference
Table 5.2 showed that decreasing cigarette circumference is
estimated to reduce the cost of producing cigarettes. The
reduction in cost is driven by a decrease of nearly 30
percent in the quantity of domestic tobacco required. Paper
costs are estimated to decrease by 16 percent, and other
costs by 0.34 percent on net. The total change in produc-
tion cost is estimated to be a decrease of about 3 percent.
Table 5.11 summarizes the results of two analyses for this
modification. (See appendix tables C.1 through C-6 for more
detail.) First the types of impacts are listed, grouped by
major category. Then, in the first two data columns, results