Nicotine Products in Switzerland

The proportion of Swiss citizens consuming nicotine products in 2020 is 25.5%, according to the Global Tobacco Index, while Swiss Medical Weekly claimed that the real rate should be greater than 31%

Nicotine is an important industry in Switzerland, as the biggest cigarette company in Europe, which is Philip Morris International Inc, has a branch located in this country. The proportion of Swiss citizens consuming nicotine products in 2020 is 25.5%, according to the Global Tobacco Index, while Swiss Medical Weekly claimed that the real rate should be greater than 31%. There are around 9500 people in Switzerland die a year because of nicotine disease, which is around 15% of all the deaths in this country.

Although it is not the leading rate worldwide, it is still a problem that has to be solved as nicotine consumption will bring a negative externality to society. Therefore, the government will have to reduce the negative impact by issuing policies.

Government usually reduces the negative externality of consumption by increasing the price of particular products with tax. When the price has increased, the quantity demanded of the product will decrease thus reducing the negative externalities. However, due to the importance of the nicotine industry to the Swiss economy, it has a strong control over Switzerland. The industry provides employment opportunities, while the tax revenue is a significant part of the government income. Therefore, the government has to try to balance the use of strong policies to reduce negative externality, while also trying to keep the economy stable. Hence, this paper will determine the extent to which the Swiss government has been successful in reducing the negative externality of nicotine product consumption.

Although Switzerland has a healthy, environmentally friendly national image, it has relatively lenient nicotine regulations compared to some other European countries. Switzerland banned indoor smoking three years after other European countries issued strict rules on nicotine, while outdoor smoking is still allowed and many fumoirs are built indoors (Swissinfo: Where Switzerland Stands on Passive Smoking).

Due to the high income, the cigarette price in Switzerland which is around 7 CHF is relatively cheap, 27% of Swiss adults smoke while the figures of consumption of nicotine products were published in a significant data (Euronews). Around 51% of boys and 35% of girls among 15 year olds had smoked at least once (MonAM). This smoking trend could be ascribed to the significant influence of the nicotine industry to the Swiss economy. It can contribute over $6 billion a year and provide about 11,000 jobs to the Swiss economy, according to the BBC news (Swiss Approve Tobacco Ad Ban Long after Neighbours). In this case, the government will tend to adopt a softer policy, where they neither implemented vaping product tax nor restricted advertisement and smoking in public, leading to an increasing number of individuals consuming nicotine products.

On 24th May, 2023, the Swiss government said that tobacco advertising on printed media will be banned from 2026 while online advertisement can only exist with age-limited controls (Swissinfo: Switzerland to Implement Tobacco Advertising Restrictions).

In my research, most of my data were from secondary research to analysis about market failure, negative externalities, and possible factors of demand and supply that could negatively impact consumption rates. After that, I will compare the externality before and after the legislation that the government might issue. The real world data will be also included in order to make the research more reliable, and see if government intervention really plays a role in reducing the negative externality of nicotine products. Other than that, some graphs will also be drawn to help me illustrate the information, and show the change directly.

In a free market, the market is at equilibrium when all resources are allocated efficiently. On the other hand, an inefficient allocation of resources will lead to a market failure, and create negative externality. Negative consumption externality refers to the external cost created by the consumers. In this context, the consumption of nicotine products can create health problems and secondhand and thirdhand smoke (the pollutants that settle indoors when tobacco is smoked), which can affect the third party who does not belong to the consumer or the producer as nicotine products are a demerit good. When there are less healthy people, the work force of Switzerland will be reduced thus the country will be less productive. Other than that, the cost of pain from disease, loss of life quality, potential cost of taking care of a relative with disease resulting from nicotine consumption can also create negative externality, which is also a market failure.

Figure 1: The margin social negative externality of consumption of nicotine products in Switzerland

The marginal private cost (MPC) means the cost of producing per unit of goods, the marginal private benefit (MPB) is the benefit of consuming per unit of goods, and the marginal social benefit (MSB) is the benefit per unit consumed to the society. Consumers are usually ignoring or unaware of their cost to society, so they will consume at the level of MPB=MPC. In the figure 1, the market of nicotine products is at an equilibrium level of Qe and Pe, while the social efficient equilibrium is at Q* and P*. Hence, the nicotine products in the Swiss market are being overconsumed by Qe – Q*, leading to a welfare loss shown by the blue triangle.

There are several factors that can reduce the consumer spending on one product, and a significant government intervention is to add indirect tax. High tobacco prices discourage existing tobacco users to keep consuming it, reduce the quantity of tobacco consumed and prevent potential users from trying it.

Product

Current Excise tax (2021)

Cigarettes

53%

E-Cigarettes

0%

Pipe Tobacco (Tobacco heating systems)

12%

Table 1: Taxation applied on different nicotine products in Switzerland（Swiss Medical Weekly)

Indirect taxes are a very effective intervention to reduce consumption, as indirect tax has a greater effect on the population with lower income, which is usually the majority of the society. As heated tobacco products were introduced to the Swiss market in 2015, and these novel tobacco products have not been defined in a tax code, but are taxed as “pipe tobacco” Switzerland applies a mixed tax system, in which cigarettes have a minimum excise. In 2020, the specific excise tax rate was CHF 118.32 per 100, which was 20% for the sales price and the minimum excise was CHF 212.1 per 1000 sticks (Campaign for Tobacco Free Kids). Meanwhile, the Federal Council of Switzerland has also tried to request new taxation for other nicotine products and electronic cigarettes.

Figure 2: The Tobacco market of Switzerland after adding tax

From the graph, we can see as the government add an indirect tax to the tobacco products, the marginal social cost will shift to the left, so although tobacco products are not consumed at the social efficient level where MSB=MSC, they are still consuming at the social efficient quantity Q*, where MSC + tax = MPB. However, although the increase of indirect tax can benefit the society by reducing the health issue and increasing the tax revenue of the government, it is still a hard thing in Switzerland to increase the tax amount.

When the government receives the tax revenue, this amount of money will be paid by consumers and producers. The proportion that they shoulder is based on the price elasticity of supply of the supplier and the price elasticity of demand of the consumer. For nicotine products, the price elasticity of consumers is more inelastic than the price elasticity of producers, therefore the consumers will pay a larger proportion of the tax, than the producers. As the demand or supply goes more inelastic, the curve becomes steeper. As shown in figure 3, the demand curve is steeper than the supply curve, so the orange area representing the consumer burden is greater than the green area which represents the producer burden.

Figure 3: The consumer and producer burden of tobacco tax

According to Statistics, an online platform providing data analysis, the revenue of the tobacco market in Switzerland reached $4,693.80m in 2022. This huge revenue brought by the tobacco industry is benefiting the Swiss economy, as it provides a huge amount of jobs and a significant amount of tax as the government income, they are having a broad influence over the Swiss society. Consequently, if the Swiss government decides to reduce the negative externality of consuming tobacco products by adding tax, the industry may hinder the establishment of this law, or it is going to disturb the economy and create a huge loss of jobs and income. Therefore, it is hard for the Swiss government to further increase the tobacco tax.

Other than that, tax can also be less effective in the real world, as the impact will depend on price elasticity of demand and consumer income. Price elasticity of demand is a measure of responsiveness of consumer's quantity demand to a change of price, measured by %. The price elasticity mainly depends on the availability of potential substitutes and the necessity of it in consumer’s daily life. Tobacco products, which don’t have any substitutes while vaping products create the same problems that cause negative externality, so it is not a good alternative. Furthermore, although nicotine products are not a necessity, the consumption of nicotine products can result in addiction. Due to the addictiveness of nicotine products and Switzerland’s high average income, the PED of nicotine products in Switzerland will tend to be inelastic.

PED can be calculated by the following formula:

Unfortunately, I didn’t find reliable sources for the quantity demanded of nicotine products in Switzerland. Therefore, I will apply the result from NIA, that the PED of cigarettes in Europe didn't change during the past 10 years, which is around -0.4. Products that have inelastic demand have PED values smaller than 1, while elastic products are greater than 1. In this case, the demand for nicotine products is quite inelastic. We can predict the extent to which the tax policy will be effective as we know the price elasticity of demand, which the PED of -0.4 means when the price of cigarettes increases by 1%, the quantity demand will decrease by 0.4%.

Another factor that significantly affects consumer demand of a product will be the income of every consumer. The greater the percentage of income they have to spend on nicotine products, the larger the decline in consumption after the price of cigarettes has changed.

Year

Gross National Product (CHF)

Average national income (adult) (CHF)

Price of Cigarettes (CHF)

Price of Cigar (CHF)

2018

67,932

51,837

0.40

0.49

2019

68,179

52,636

0.41

0.49

2020

66,035

51,443

0.43

0.51

2021

68,375

53,661

0.44

0.56

2022

70,310

55,433

0.44

0.67

Table 2: Switzerland’s national income (data selected from World Inequality database)

While people’s income is increasing, the Swiss government has not made any changes with the nicotine tax since 2018 (Swiss Federal Customs Administration). From table 2 we can see that Switzerland’s average national income is quite high, and is increasing, except 2020 when the covid 19 outbreak. Between the 5 years, the average national income has risen by 6.9%, while the price of tobacco products increases by 11% and 16%. Consequently, although nicotine products have a greater change in percentage compared to national income, it still takes a smaller percentage of the average consumer’s income.

Advertising, as a method to increase public awareness is undoubtedly to have a huge effect with quantity demand of tobacco products and vaping products. On 24th May, 2023, the Swiss government said that tobacco and e-cigarette advertising on printed media will be banned from 2026 while online advertisement can only exist with age-limited controls. Other than that, they had also implemented their policy to place health warnings on all cigarette packages in January 2010 (Tobacco Labelling Resource Centre). Health warnings are required to cover 48% of the front and 63% of the back of all cigarette packages, while words like “light” and “mild” are prohibited from the packages.

By preventing nicotine advertising on printed media and the negative advertising such as informing the drawbacks of it on cigarette packages, the Swiss government is aimed to decrease the demand of nicotine products by increasing consumer awareness and preventing teenagers from trying them. In fact, countries that have already introduced bans on tobacco advertising are showing an average of 7% reduction in tobacco consumption (World Health

Organizations).

Figure 4: the nicotine market in Switzerland after government policy

By looking at the graph, we can see that once the government has implemented the advertisement policies, the demand curve will shift to the left, from D1 (MPB) to D2 (MSB). This is because of the increasing consumer awareness and reduced consumption, especially among teenagers. Individuals aware of the negative effects of nicotine products will be concerned about whether they should consume it, and teenagers will be less likely to get curious and be inducted to nicotine products, thus reducing consumer demand. Once the demand curve shift from D1 (MPB) to D2 (MSB), a new equilibrium position will be created at Q* and P*. The quantity of nicotine products will decrease from Qe to Q*, while the price also decreases from Pe to P*. This change in price is also a difference between the method which aimed to increase the public awareness of the potential health concern of nicotine products and indirect tax, where indirect tax will not keep the price in the socially efficient level as it reduces consumption by increasing price. Consequently, nicotine products will be consumed at the socially efficient level, where MSB=MSC. Government is able to reduce the negative externality successfully with advertisements.

On the other hand, taxation might not be as effective as advertisement, as Switzerland is a high-income country. Nicotine products only take a small proportion of a person's income, making the demand more inelastic.

Sales of Nicotine Products

To measure the impact of the legislation on negative externalities created by nicotine product consumption, I will analyze the market volume and the average volume per capita.

Figure 5&6: The volume of tobacco products and the revenue of nicotine products in Switzerland (Adapted from “Statista”)

As we can see in figure 5, the tobacco sales show a downward trend from 2014 to 2022, and are predicted to keep declining in the future. The volumes of nicotine products dropped from 10,302.45 million to 9,144.76 million, which is a decrease by 12.7% from 2014 to 2022. Although a rebound occurs in 2020 during covid outbreak, overall, the volume of tobacco products still has shown a declining trend. However, the revenue of all nicotine products does not present a strong negative trend as the tobacco market. The revenue keeps decreasing from 2014 to 2018, but rises back to 4,768.89 USD again in 2020. This might have a relationship with the overturning of the Swiss ban on e-cigarettes in 2018 (Swissinfo: Court Overturns Swiss Ban on E-cigarettes). Moreover, it is hard to include the restrictions on advertising into the prevention, because it has not happened yet, and the actual volume of tobacco products after 2026 when the advertisement law is published might be even higher. The decline of the tobacco market has a chance to happen due to other factors, such as the rise of e-cigarettes.

Unlike tobacco products, nicotine products such as e-cigarettes which do not include tobacco can also create a negative externality to Swiss society. As mentioned above, the Swiss government has not added any taxes with vaping products yet. Initially, Switzerland was taxing electronic cigarettes, however, the tax was dropped in 2012. After 10 years, on 26 October 2022, with the project proposed by Switzerland’s Federal Council which requested taxing electronic cigarettes, the Swiss government decided to introduce a new tax for it (Le News). In this proposal, two types of e-cigarettes are distinguished, and be taxed at different levels. The liquid of reusable products are taxed at a lower rate of 20 cents per milliliter, while the liquid of disposable vapes will be taxed at 1 CHF per milliliter (Le News). This lower rate of taxes is expected to encourage tobacco consumers to consume electronic cigarettes as a substitute and can play the role efficiently as a smoking cessation aid, as tobacco products are usually more harmful. Therefore, it is taxed at a lower price.

On the other hand, vaping product’s effect towards teenagers is significant, as e-cigarettes with nicotine can be bought by teenagers as long as they satisfy the technical requirements of other European countries, making it easy to be consumed, thus persuading young adults to become nicotine addicted (Swiss Medical Weekly). The sweet flavours provided by e-cigarettes producers also encourage the general public who dislike the smell of cigarettes to consume it. This makes electronic cigarettes more attractive with the teenager groups, thus it is necessary to issue laws and regulations with it. It is undoubtedly that vaping products do not contain tobacco, which creates a greater issue. However, they contain nicotine, which also creates a negative effect for individuals and society. Nicotine is a highly addictive substance, leading to physical illness such as stimulating mouth and throat, increased salivation, nausea etc. Meanwhile, the liquid contains numerous toxins and carcinogens. Although the consumption of vaping products does not create second hand smoke, it still creates negative externalities to Swiss society as it causes health problems, which is taking up medical resources and decreasing the productivity of the workforce.

The laws against advertising will be issued with the laws against tobacco products, while the tax policy is predicted to have a huge effect on vaping product consumers, because a huge proportion of this community are the teenagers, who do not have an income yet. By searching on the internet, we can see that many e-cigarettes advertisements emphasize its relatively cheap price compared to cigarettes, thus we can see that the price is an important factor of the demand of e-cigarettes. The level of tax with the disposable e-cigarettes and reusable e-cigarettes is 5 times different based on this consideration, as the reusable e-cigarettes tend to be cheaper than the disposable ones, so it can be more popular in the teenage group. Taking this into account, the Swiss government imposed a cheaper tax on reusable vaping products, and a higher tax of disposable vaping products. In this case, the tax amount can encourage adults to consume reusable vaping products, which create less harm to society, while discouraging youths to start using vaping products (Swiss association for tobacco control).

Figure 6&7: the vaping product market of disposable and reusable products after tax (Swiss association for tobacco control)

From figures 6 and 7, we can see that as the tax is added to the vaping products, the quantity demanded will decrease while the price increases. For the disposable products, the change will be more significant, as the price increased from 9.90 CHF to 10.90 CHF, which is an increase of 10%. Therefore, as many vaping products consumers are teenagers, whose demand is more price elastic, the quantity demand will decrease from Qe to Q1, to a greater degree. Meanwhile, as the tax imposed on reusable vaping products is cheaper, the quantity may also decrease at first, from Qe to Q1, while the price increases to P1, which equals to Pe + 20 cent. However, due to the expansive tax imposed on disposable vaping products, the consumer it loses might change to the reusable vaping product market, which shifts the demand curve from D to D1. In this case, the quantity demanded of reusable vaping products will increase from Q1to Q2. Consequently, although the tax can discourage teenagers from consuming vaping products, while encouraging tobacco consumers and disposable vaping consumers to use reusable vaping products as a substitute, it can still create a negative externality to some extent. Overall, the tax on vaping products needs to be set carefully, because the government wants to encourage the public to use this substitute product which creates less harm, while it needs to be able to protect teenagers from nicotine.

The data implies that the Swiss government is being successful in its attempts to reduce nicotine consumption, as the total number of nicotine products sold declined by 12.7% from 2014 to 2022. Meanwhile, although the Swiss government did not increase nicotine tax, which might lead to the benefit that nicotine companies can create for the Swiss economy, they can still receive a significant tax revenue from the indirect tax. From the research, it is clear that Switzerland’s smoking population is decreasing. However, there is no clear evidence linking it to government intervention, as they have not changed the nicotine tax or issued new laws against nicotine yet.

On the other hand, as taxation is being inefficient in Switzerland, it could have a limited impact with quantity demand of nicotine products. It is also hard for the government to impose a larger percentage of taxes on nicotine products as it will damage the interest of Swiss nicotine producers, which is an important industry in Switzerland. If the tax is increased, then the nicotine production business may have to lay off employees in order to maintain their benefit. In this case, the unemployment rate in Switzerland will increase, which also creates a negative effect on society as productivity decreases.

Further educating the population and ensuring the younger generations have knowledge about the negative effects of nicotine products can be more effective, and plays an important role in reducing the nicotine consumption. Therefore, the limitations with nicotine advertisement and negative advertisement are the key to reduce negative externality of nicotine consumption. While the Swiss government has decided to issue a law to ban tobacco advertising in 2026, the negative advertising on cigarette packages definitely helps reduce smoking just like what the data shows.

My research suggests government intervention is long-term and still needs to be improved, as changing people’s habits and addictions takes time. The government should increase the education about the negative effects of nicotine products, because of the potential risk of increased nicotine tax.

In conclusion, the Swiss government is being successful in reducing the negative externality of nicotine consumption, as the sales do decrease. However, it is difficult to determine exactly how much of the decline is due to the new government intervention and how much is due to other factors such as social media publicity and the change of consumer taste. Moreover, it is yet also hard to predict the exact influence, because they decided to publish the policy in 2026, which the change also needs a period to be noticed by consumers.

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