When we buy a packet of cigarettes for $8, we may think that this is the personal cost. But, a new study claims the real personal and social cost of smoking a pack of cigarettes is closer to $200. pdf of report – Report by Kip Viscusi and Joni Hersch
To arrive at these statistics they look at the likelyhood of early death from cigarettes. Smoking is generally assumed to reduce life expectancy by a number of years. However, smoking can also reduce quality of life, from an early age. E.g. breathing difficulties.
An economic cost can be placed on each year of life that is lost. This includes lost earnings, lost output, plus a value on social life. At a very rough estimate we may say one year of life is worth $100,000
From these statistics we can get a rough idea of of how much a packet of cigarettes actually costs to the individual.
Thus, it appears that cigarettes are a classic example of a demerit good. It shows that consumers can be very bad at assessing risk and the personal utility of certain goods. This is a justification for higher taxes for consumer on cigarettes. See – should taxes on cigarettes be increased?
In addition to the extra private costs, there are of cause external costs to the rest of society.
hat tip: Freakonomics