CASHING IN ON DYING EARLY? âTHE IMPACT OF ERROR TERMS ON THE ESTIMATION OF THE EXTERNAL COSTS OF SMOKING.â

Cigarette taxation is a topic which economists have focused on for years. Thepurpose of the cigarette tax is to force individuals who engage in risky activities to payfor the negative externalities caused by said activities. In the case of cigarette smoking,the notion has been that society as a whole subsidizes the smoking related externalexpenses through programs such as Medicare, Medicaid and group life and healthinsurance. At the center of this debate is âCigarette Taxation and the SocialConsequences of Smokingâ by W. Kip Viscusi. Viscusiâs paper written in 1995 for theNBER publication Tax Policy and the Economy contains estimates of both the netexternal costs and benefits of smoking. This paper evaluates the confidence level ofViscusiâs external cost and savings estimates and assesses the impact of error terms onhis conclusions. By allowing the potential for error to factor into the cost estimates ofexternal costs per pack, Viscusiâs point estimate becomes questionable.