Abstract

We examine the impact of the Ontario Tobacco Transition Program (TTP) on domestic tobacco demand. We show theoretically how the TTP can result in expanding production and exports, and subsequently affect healthcare costs. Health advocates for a smoke-free Ontario were generally in favor of the TTP at the preliminary stage, since it appeared that the Ontario tobacco growers had agreed to never produce tobacco again in exchange for participating in the $286 million TTP. Much to the dismay of health advocates, the Canadian farmers continued producing tobacco in 2010 and beyond, even after collecting money from the buyout, since they were able to successfully take advantage of the poorly written policy by finding loopholes in the new licensing system. We include general equilibrium considerations in our welfare economics analysis (such as smoking-related healthcare costs), as the traditional measures of “gains” and “losses” due to a policy implementation do not entirely apply, given that tobacco is a harmful good. The introduction of electronic cigarettes also impacts the future of the tobacco industry by reducing the demand for cigarettes.