Optimum Quantity for a Harmful Output: How Many Cigarettes?

Some outputs, such as cigarettes, result in sharply negative effectual value because of the severe health problems they cause. Even if such outputs are produced under excellent conditions, allowing workers to gain health during production, the value derived from their consumption will likely be lower than production cost at all output levels.

Based on ENL's criteria, such outputs should not be produced at all, and they are therefore called irrational outputs. The optimum quantity for such outputs is zero, which means that production at any level would constitute overproduction.

The following figure depicts two examples of irrational outputs.

Irrational outputs
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An output is irrational if its input cost is greater than its effectual value at all quantities. Here this is true for tomatoes (top) because of high input cost, and for cigarettes (bottom) because of low effectual value.

For cigarettes, input cost is assumed to be negative across the whole output range. Because negative cost implies positive health, this means that considerable health is achieved in the production process.

However, the effectual value from consumption is so low that this prospective gain is entirely cancelled out. Social losses are incurred at even the lowest quantities, so any production of this output is economically unjustified.

The same can be said for war materiel, such as bombs and bombers. The potential value of such outputs is roughly equal to their capacity to destroy human lives, which means it is highly negative. Their effectual value is roughly equal to the lives actually destroyed (lost potential health), hence negative to the extent that this occurs.

War materiel thus consists of irrational outputs that should never be produced for economic reasons. Political justifications will of course be cited for such production despite this conclusion, but these are beyond ENL's analytical scope.

Unlike the examples of cigarettes and bombs, the output in the top graph shown in the figure above generates positive effectual value across its entire range, indicating that health would be gained from its consumption.

Here, however, the input cost is so high that this prospective gain is completely wiped out. Production of this output is therefore irrational as well.

A possible example of this situation is tomatoes and other field crops. These generally result in high effectual value when consumed, but they are often grown under unhealthy conditions of extreme heat, exhaustion, and chemical contamination, thus incurring high labor cost.

As well, the outputs are usually transported long distances to their markets, thus incurring considerable natural cost. The sum of these costs, which is the input cost of their production, could in some cases exceed their effectual value even at low quantities.

Although our conclusions regarding optimum output quantity are the same in these two situations, there is an important distinction between them with regard to equity.

In the bottom case (cigarettes) the losses are caused by consumption, which in most cases is a voluntary activity. If this output is produced despite its irrationality, this will be due to demand from consumers who will incur the negative effectual value themselves.1

In the top case (tomatoes) the losses are caused by production, which is largely an involuntary activity because most people have to work to survive. If these tomatoes are produced, this will be due to demand from consumers who very likely will not incur the input cost themselves. These consumers will gain from the effectual value, but will shift the labor cost to workers and the natural cost to the public.

In general, when the input cost of producing an output is high — whether or not overall losses result — we must ensure that the burdens of production have not been imposed unfairly on the powerless, and that the social standard of equity is met across the geographical scope of our analysis.

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