Would Big Tobacco Have Been Better? The Social Welfare Implications of Antitrust Action in the Presence of Negative Externalities

This paper considers the role of antitrust action in markets with negative externalities and the social welfare consequences of the 1911 break-up of American Tobacco. A theoretical model shows that monopoly can be the preferred market structure in some cases. We provide rough estimates of the magnitude of the excise tax necessary to offset external costs in the cigarette industry and compare these estimates to current tax levels. Our results suggest that the optimal tax may be beyond a level attainable in the current market and that antitrust action in the industry may have been socially inefficient