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This article explores a wide range of issues that proponents of setting minimum prices for alcohol must resolve before they can safely claim their proposals improve public health and decrease public health care costs. Problems range from inability to know ‘correct’ prices and why tacking on pricing regulations to markets already taxed makes sense, to various unintended adverse consequences such as generating higher demand for illegal drugs and alcohol. It also remains unclear why advocates would not prefer to raise taxes since this is the typical method that economists propose to correct markets in which harm spills over to innocent parties.

Many countries are either introducing or proposing to introduce taxes on fat in foods as an attempt to curb growing rates of obesity. It is argued here that such taxes would be uneconomic, ineffective, discriminate racially, encourage rent-seeking behaviour and result in various adverse unintended consequences.

Good information is necessary for markets to allocate resources efficiently. Tobacco is a demerit good; smoking endangers smokers but also exerts externalities on non-smokers. Public policies, however, foster misinformation, are contradictory and damage public health. Current policies also deny feedback from the tobacco industry and reduce consumer information about tobacco products that could substantially reduce the harmful effects of smoking.

The United Kingdom has recently enacted smoking bans in public places such as restaurants and pubs. Public health advocates argue that bans are necessary because non-smokers need protection from second-hand smoke. Advocates also claim that bans do not exert harm on owners because of a vast empirical literature showing that restaurants and bars in the United States never suffer harm following bans. This paper examines whether these claims are true by developing a model within the Coasian framework whereby owners of businesses have incentives to deal with smoking disputes between smokers and non-smokers. Our model demonstrates that it is incorrect to argue that smoking bans are necessary because the private market has no method of attempting to solve smoking problems. It also predicts that bans exert different effects on different businesses: some will be unaffected while others will experience losses or gains. Our literature review reveals that predictions of differential effects are consistent with the empirical evidence.

This article examines the effect of restrictive smoking laws on restaurants, bars, and taverns. Supporters of these laws often argue that they do not harm firms and may even raise profits. Opponents argue that owners cater to customer smoking preferences, and laws mandating specific policies will negatively impact profits. This article provides a framework for examining the distribution of effects that smoking laws exert on businesses, and demonstrates that changes in total sales or tax revenues do not provide a meaningful understanding of the economic implications because smoking laws exert different effects on different firms. The distribution of these effects is examined using data from a nationwide survey of 1,300 restaurant, bar, and tavern owners. While some subsets of firms are predicted to suffer revenue declines, bars are predicted to be more than twice as likely to experience losses as restaurants. An important implication is that the increasing level of governmental restrictions on smoking in the hospitality sector could gradually impact the types of service available to the public.

MICHAEL L. MARLOW [*] Supporters of smoking laws often argue that they do not harm restaurants, bars, and taverns and may even raise their profits. Opponents argue that owners cater to customer preferences regarding smoking and that laws mandating specific smoking policies will therefore negatively impact profits of some firms. This article tests hypotheses regarding how smoking laws affect seating allocations, using data from a nationwide survey of restaurant and bar owners. The empirical evidence indicates that smoking laws exert no significant effect on seating allocations. Firms are shown to allocate greater shares of seating to nonsmoking use when customers exhibit stronger preferences for such seating. (JEL K2, H0) I. INTRODUCTION Laws restricting smoking in restaurants have been enacted in 32 states. Supporters of these laws often argue that they do not harm firms and may even raise their profits. [1] Recent studies, for instance, argue that outright bans on smoking in eating and drinking places have not adversely affected these establishments, suggesting that smoking bans either do not reduce demand or lower costs for firms, which offsets sales losses, thus leading to no adverse changes in profits. Opponents of smoking restrictions argue that owners cater to customer preferences regarding smoking. Some owners would find it profitable to allow smoking throughout their establishments, others to forbid all smoking, and still others to accommodate both smokers and nonsmokers by investing in partitions, designating areas, creating smoking patios or rooms, and/or investing in air filtration systems. They argue that laws that mandate specific smoking policies will therefore negatively impact profits of some firms. Little economic research has been published on the effects of smoking laws on revenues of restaurants, bars, and taverns, and none has been directed toward the issue of smoking/nonsmoking seating allocations. [2] This article provides a framework for examining how customer preferences influence smoking and nonsmoking seating allocations by owners--the primary policy that firms unilaterally adopt in their attempts to deal with the issue. Hypotheses regarding how smoking laws affect seating allocations are then tested using data from a nationwide survey of 1,300 restaurant, bar, and tavern owners. The empirical evidence indicates that smoking laws exert no significant effect on seating allocations. II. ECONOMIC MODEL AND TESTABLE HYPOTHESES Without legal restrictions, policies adopted by restaurants, bars, and taverns toward smoking are determined in much the same manner as decisions regarding menus, prices, and hours of operation. Profit-maximizing firms optimize on the basis of customer demand and costs. Decisions pertaining to smoking policies simply allocate the air space within firms between smoking and nonsmoking customers. [3] The air space within an establishment is considered just like any other resource, and owners decide to cater solely to smokers, to nonsmokers, or to both by providing patrons with rights to smoke while accommodating others through smoking/nonsmoking areas and air filtration systems. The choice depends on customer preferences and relative marginal costs. [4] Predictably, market segmentation naturally evolves where firms cater more to smokers in markets dominated by smokers than in those markets dominated by nonsmokers. There may also be broad differences between how owners of restaurants and bars or taverns allocate seating. Customers of restaurants are likely to prefer that owners adopt different accommodation strategies than would patrons of bars and taverns. Restaurant customers tend to dine in one location within firms, and therefore it is possible for owners to designate sections for smokers and nonsmokers, and this predictably leads to a relatively high allocation of nonsmoking seating. In contrast, customers of bars and taverns may prefer to participate in various activities (dining, drinking, listening to music, dancing, and playing pool, darts, and billiards) whereby they move to different locations within the establishment during their visit and interact with different patrons. …

THE EMPIRICAL RELIABILITY OF MONETARY AGGREGATES AS INDICATORS: 1983-1987 I. INTRODUCTION It is widely believed that monetary aggregates have failed to predict real growth and inflation over 1983-87. This presumed breakdown of previously reliable linkages between money growth and future output and inflation has been variously attributed (by the present authors, among others) to changes in money demand induced by regulatory change and to parameter instability due to structural change. This paper observes that these disputations may be moot, since the traditional definition of money (currency plus demand deposits) shows no evidence of structural change, and yields nearly as low or lower prrediction root mean square errors for both real GNP growth and inflation over 1983-87Q2 than the standard errors of estimate obtained for 1961-82. Part of the so-called "breakdown" in the monetary indicators -- especially in the case of M1 -- may be explained by the fact that current M1 (or M1B) is defined much like the "old" M2, and current M1A is defined much like "old" M1. Thus, it is probably not too surprising that use of M1 as a monetary indicator does not yield consistent predictive power over a period of time in which it experienced redefinition. If there is a mystery in the 1980, it is not why M1A has done so well but why economists abandoned it for broader M1B (currency, demand deposits and other checkable deposits or OCDs). (1) With the nationwide introduction of negotiable order of withdrawal (NOW) accounts on January 1, 1981, M1A fell by 5.5 percent (a 22.1 percent per annum rate) in the first quarter, while M1B rose at a 3.1 percent per annum rate. At the time, the Federal Reserve System expected M1A demand to shift down as households chose to substitute from demand deposits to the newly available (in most states) OCDs. Accordingly, the sharp drop in M1A was expected to be reflected in a once-for-all upward shift in its velocity with no effect on nominal income or its components. (2) However, consistent with the shock-absorber view of money demand, even if the long-run demand for M1A was unchanged, a sharp decrease in its quantity would induce an equal contemporaneous increase in its velocity. (3) Contrary to the Federal Reserve's expectation, the shock absorber view would thus predict that the actual value of velocity would temporarily exceed its long-run equilibrium level so that nominal income would tend to fall or grow less rapidly as M1A velocity adjusted to the money shock. Figure 1 shows that, compared to a relatively small drop in M1 velocity, the contemporaneous velocity of M1A moved sharply in the first quarter of 1984. (4) The shock-absorber hypothesis suggests that contemporaneous velocity movements would be dominated by money supply shocks and thus attributes the different movements of M1A and M1 velocity to differences in magnitude and signs of the shocks in M1A and M1. What Milton Friedman [1983] calls "leading velocity" is a crude way of allowing nominal GNP to adjust to past money shocks. Panels a and b in Figure 2 illustrate leading velocity for lags between money and GNP of one and four quarters respectively. The longer the adjustment lag, the more leading velocity becomes a smooth, trend-dominated series for M1A. (5) However, M1B continues to display a sizeable break from its historical pattern. This observation suggests that the recent behavior of the economy may be consistent with that indicated by movements in M1A, and that the choice to switch to M1B as the standard definition of the "narrow" money supply was unfortunate and a major source of recent forecasting failure. (6) This paper runs a race among M1A, M1, and M2 by comparing out-of-sample forecasting performance and tests of structural stability. (7) An explanation is also offered for the observed departure of M1 velocity from its historical trend. Based on a large battery of conventional tests, the results are remarkably favorable to the continued reliability of M1A as a useful indicator of future economic performance and for its relevance as a tool in monetary policy. …