Friday, 6 January 2012

Accidentally creating big numbers

Remember Radio NZ's reporting that smokers each cost "the economy" $139k annually? The Quit Group helpfully tells me by email that the figure, derived from Des O'Dea's prior report with some help from BERL, was actually the present discounted value of the stream of costs associated with a smoker.

An annual cost of about $11,350 gets you a PDV of $139k at an 8% discount rate. So messing up the difference between the PDV and an annual cost gets you an order of magnitude error.

And recall too that the O'Dea report included a rather extensive list of costs more properly viewed as costs to the smoker than as costs to "the economy". As O'Dea concluded about the costs smokers impose on "the economy":
Leaving aside these difficulties, it is certainly reasonable to assume that most of the additional health-care costs caused by smoking are borne by non-smokers through additional taxes (smokers do pay some share of these taxes). Also it is reasonable to assume that most of the 'lost  production' costs of premature mortality and increased morbidity are borne by smokers and their households (though there is some loss of profits also, and of tax revenue to government). A considerable amount of work would, however, be needed to get precision on these matters.

Without trying to calculate a precise estimate of 'external costs' it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality of smokers were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased. [emphasis added]
Here's my prior critique of the O'Dea report (and more detail, with summary of cost components, here). Here's a prior summary post on the health costs of tobacco in New Zealand.

I trust The Quit Group will pass along a correction to Radio NZ. Annual costs aren't quite the same thing as the present discounted value of a stream of annual costs.

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