The effectiveness of Hong Kong's 2022 E-cigarette ban

This research aims to investigate to what extent HK's 2022 e-cigarette ban has altered consumption. I chose this investigation topic because various flavours and "trendy" packaging associated with e-cigarettes have attracted not only adults but adolescents, and I wanted to research the success of  HKG's discouragement campaign among my peers and other age groups. Non-price determinants including addiction, substitutes and income that could influence Price elasticity of Demand (PED). are all factors I should consider when justifying the changes in demand for e-cigarettes. As part of IB Economics, I learnt it’s essential to analyse the external-costs (health impact, second/third-hand pollution, etc.)  associated with demerit goods (e-cigarettes) that could impact an unrelated third-party as it's not reflected upon the price. Ergo, this research will focus on answering the research question, "To what extent has Hong Kong's 2022 e-cigarettes ban been effective in reducing demand amongst different age groups?" through investigating how price and consumption changed as a whole, and then by age group (Adolescents, Young Adults, Adults), pre-ban and post-ban after April 31st 2022. This will help me determine if the bill was an essential step to reducing demand and achieving "a smoke-free Hong Kong" (Legislative Council).

E-cigarettes/vapes were invented in 2003 (Legislative Council). Unlike cigarettes (referring to tobacco-cigarettes), they're electronically powered and work by super heating the "e-liquid", which contains but is not limited to nicotine, glycol and flavouring to create a vapour that's inhaled. Although the long-term effects are still to be determined, nicotine is found to be an addictive chemical compound that can increase blood pressure, heart rate and narrowing of the arteries - all potentially leading to death (American Heart Association).

Introduced in 2008 in Hong Kong (HK), the demand for e-cigarettes has skyrocketed amongst the population as a substitute for cigarettes, as it boasts a lower cost-per-use, with many believing it to be "less" harmful than cigarettes. This popular device opposes the social stigma against traditional cigarettes' smell, allowing for more subtle use. Although the number of smokers has declined by >10% in HK, the Census and Statistics Department interviewed 10,000 households. The results showed individuals over 15 using alternative tobacco products (ATP) rose from <1000 (2015) to >5000 (2017) (Chen, "More Smokers in Hong Kong Turning to E-Cigarettes, Survey Reveals"), illustrating its popularity among the youth. In October 2021, the Hong Kong Government (HKG) banned e-cigarettes sales, including its

complementary products, to lower the prevalence of smokers by eliminating the presence of ATP. After the ban was enacted, imports, sales, advertising, manufacturing and distribution of e-cigarettes were prohibited. Personal consumption, however, was still allowed.

I.  A survey (refer to Appendix A) was used to discover the relationship between demand for e-cigarettes before and after HK's 2022 e - cigarette ban. The research was collected in three sections -

• How consumption has changed to understand if the ban was able to eliminate the negative externality.
• How quantity-demanded has changed pre-ban and post-ban for different age groups.
• How demand for cigarettes has changed to identify if the ban had any unintended consequences caused by non-price determinants (i.e. substitute products).

Identifying quantity-demanded changes will help calculate PED to measure consumers' responsiveness. Qualitative data was collected to develop an insight into the population's opinion towards further government actions that could discourage consumption.

II. To reduce error and ensure responses were valid, the survey was anonymous to prevent confirmation bias to determine candid results to justify the ban effectiveness.

I.  Articles, reports and similar studies -

• Legislative Council Bill 2019-2021 reports on the Bills committees deliberations on smoking (Public Health) provided information on why e-cigarettes were banned and on previous demand for e-cigarettes.
• South China Morning Post Articles “Hong Kong bans sale of e-cigarettes and other heated tobacco products but personal use is still allowed” and “Hong Kong make first arrests under law banning sale of e-cigarettes, two suspects remain in custody”, and Press Releases by HK Police Force (HKFP) provided information on regulations emplaced and the level of government monitoring and enforcement post-ban.

II. IB Economics textbook for definitions and theories

With basic knowledge of e-cigarettes, previous studies and economic theory regarding characteristics of a demerit-good and factors that affect PED, a general thesis can be formed - the ban will have a limited effect on discouraging consumption. The predicted results (see Table#1), categorised into three age categories, displays PED values and external factors that may influence respondents quantity-demanded. This is hypothesised, although these factors aren’t measured within this investigation,they are taken into consideration within the data analysis and evaluation as they can change the number of units bought and/or sold, irrespective of prices.

E-cigarettes, a demerit-good due to their harmful nature to consumers, and spillover effect to third-parties who are not directly associated with e-cigarette consumption. This includes second/third-hand smoke, air-pollution, burden on healthcare systems, etc. Therefore this creates a negative externality of consumption (NEC), resulting in market failure.

Figure#1 illustrates market failure from overconsumption of e-cigarettes pre-ban. The Social Marginal Benefit (SMB) is less than the Private Marginal Benefit (PMB) as PMB is not reflecting the cost to society of consuming e-cigarettes. The vertical difference between SMB and PMB displays the NEC of vapes (e.g. health consequences). In the free-market, e-cigarette consumers will maximise their private utility, and consume at quantity traded in the market (Qm), where PMB intersects with PMC. The differencebetween Qm to Qopt, the socially optimal consumption (SMB=SMC) represents overconsumption of e-cigarettes. However, based on HKG's objective of a "Smoke-free Hong Kong '', this suggests the NEC is larger than anticipated. Ergo, the Government believes the socially optimal consumption is zero, with supply completely eliminated from Qm to Qgovt. Hence, a welfare loss (ABCQm) is created, displaying the social surplus lost due to overconsumption of e-cigarettes.

Nevertheless, the results within the survey illustrate continued e-cigarette consumption, proving the ban has failed to eliminate supply at all price-levels. After regulations were enforced, quantity-demanded decreased from 61 of 82 applicants, to 45, highlighting a fall in consumption of 16 people. Out of these 45 applicants, 14 people declared they’d continue to purchase these products from stores, compared to 27 who are now receiving from dealers, online or through friends.

Displayed in Figure 2 above, the ban didn’t completely succeed in eliminating supply as the data suggests there is still an existence of black-markets sellers and unofficial imports. Supply will reduce by a limited extent where PMC shifts to PMC₂, as unauthorised sellers can trade contraband and skirt pricecontrols to earn a higher revenue resulting in prices rising from Pm to Pm₁. As e-cigarettes are addictive, consumers are willing to pay higher prices to acquire the product. Quantity-demanded falls alongside Qm  to Qm₁  despite increases in production costs and risks that prompted several producers to shut down as e-cigarettes are illegal.

his might be because the HKG overestimated the fall in consumption post-ban, as personal consumption is still allowed and those who previously used/stocked-up on e-cigarettes, will continue to use it. Furthermore the government overlooked the existence of black-markets that continue to sell towards consumers, displaying an increase in welfare loss (ABCQm to DECQm) and inability to eliminate externalities.

The e-cigarette industry's closure may increase HK's unemployment rate as both owners and employees are compelled to find alternative jobs. This reduces living conditions for industry workers and may push HKG to spend a higher-proportion of their budget on unemployment benefits and retraining programs to avoid structural unemployment.

Since the ban restricts all e-cigarettes imports, the balance of trade is imbalanced, resulting in a trade surplus as the ratio of X(Exports) - M(Imports) rises, increasing HK’s GDP. There still will be a decrease in GDP due to a fall in consumption (C) as e-cigarettes business closes, but as this industry is only worth $473millionHKD (2021)(“E-Cigarettes - Hong Kong | Statista Market Forecast”). This will reduce HKeconomy by a loss of 0.017% of HK’s total GDP of $2,890 billionHKD (2021)(“Hong Kong GDP 1960-2022”), yet the benefits of improved healthcare and foreign vape businesses being discouraged from exporting their products to HK outweigh the GDP loss and achieve the HKG objective.

The ban reduced supply from PMB→PMB1, helping the HKG work towards their objective of eliminating e-cigarette consumption. Despite reductions in the initial welfare loss (ABCQm→DECQm), supply won’t be entirely reduced to Qgovt. This is because 42 out of 61 respondents continued to vape post-ban to compensate for their nicotine addiction despite higher prices producers set with increases in associated risks and illegality.

Although “supposed” closure of the e-cigarette industry will reduce unemployment, producers are still distributing and selling these products within the black market. Despite falls in imports (trade surplus) that raised HK GDP slightly, this was an unintended benefit that doesn't correlate with the HKG objective. This suggests the ban has not been as effective as hoped in creating a “smoke-free Hong Kong''.

The primary research of this investigation consisted of an online survey sent in June-July 2022 - 82 responded. The data is separated into three different age categories - Adolescents, Young Adults, Adults - based on potential non-price determinants that could impact their choice. This sample size and variation of consumers' ages allowed for observations to determine a general-trend between e-cigarette demand and price.

The PED measurement is used to identify the responsiveness of quantity-demanded by HK’s population to changes in price. This is calculated in the formula below -

\( PED =\frac{Percentage change in Quantity Demanded}{Percentage change in price}\)

where -

\(percentage \, change \, in\,quantity \,demanded\,=\frac{Q2-Q1}{Q1}×100\)

\(Percentage \,change = \frac{P1}{P2-P}×100\)

Vape-pods and juice were chosen as products of investigation as both are complementary goods of e-cigarettes. An approximate value of these products were formulated through online research (“Relx HK 悅刻香港, Gippro | 香港電子煙及煙彈專門網購店 | vape Hong Kong”)(“狼煙 | 香港悅刻專門店 | 主頁”) and an theoretical $50HKD increase in price post-ban was assumed based on anecdotal evidence.

Survey Questions 13-16 (See Appendix A), displays the questions incorporated to calculate consumers' changes in e-cigarette consumption pre-ban and post-ban and determine if price increase is a principal determinant. Addiction, substitutes, income, and legalities were used to explain age-group PED values. Raw Data of Survey Responses 13-16 (See Appendix B), shows the amount purchased for each product from 1-11+ times per week. Thus, determining the ban’s effectiveness in limiting e-cigarette demand.

Sample Worked Calculations of PED for vape-juice in Adolescents -

Percentage change in Quantity-demanded for vape-juice

\(\frac{43-60}{60}×100=(-)28.33\%\)

Percentage change in Price for vape-juice

\(\frac{250-200}{200}×100=25.00\%\)

Price Elasticity of Demand

\(\frac{(-)28.33}{25.00}×100=(-)1.13\)

= The PED is Elastic as the value is above (-1)

*See Appendix D for the worked calculations for vape-pods (Adolescents)

Figure#3 and Table#3 reveal vape-pods exhibited inelastic demand among under-18s, with a PED of (-)0.61. The 50% price increase from $100HKD to $150HKD (Pe to P1) influenced adolescents' vape-pod demand to drop from 216 to 150 pods (Qe to Q1)

This value was unexpected as my hypothesis stated it would be elastic (see Table#1). This demand inelasticity can be explained by the various flavours (e.g. menthol, berry) and smell associated with pods, attracting the youth as they can select a preferred taste. Unlike cigarettes, which have a higher cost-per-use and fewer flavours. Moreover, e-cigarettes are convenient and concealable because they produce a vapour smoke detectors cannot detect. As users become more reliant, quitting post-ban becomes harder, creating inelastic demand.

E-cigarettes require pods (compulsory product) to function. Some may consider it to be more essential than vape-juice. It's possible individuals can receive juice from their peers as its liquid state makesit easily-divisible. Pods are more difficult to share because they are a single unit and often come prefilled with juice, limiting adolescents' need to purchase vape-juice. Despite this 50% price increase, it's still cheaper than juice, meaning it will take up a smaller proportion of their "income". Therefore, this is likely to be attractive to adolescents, where price should be the most significant determinant compared to other non-price determinants, explaining the inelasticity.

Additionally, some adolescents might begin vaping to fit into the social norm, displaying bandwagon bias. Likewise, hyperbole bias exists, whereas "teenagers" are often more oblivious to long-term effects and, instead, focus on the short-term. In this case, ignoring health concerns and rising prices and deciding to continue to purchase e-cigarettes, whether to "fit in", addiction or to quit smoking, all these options illustrate why the demand is inelastic.

Figure#4 and Table#3 show the PED values for vape-juice for under-18s were (-)1.13, indicating elastic demand. The 25% price increase from $200HKD to $250HKD (Pe to P1)  prompted adolescents to reduce their juice demand from 60 to 43 bottles (Qe to Q1).Their limited income from parents' allowances or minimum-wage jobs explains the fall in consumption, where price increases will result in vape-juice taking up a higher proportion of their "income". Thus, some might elect to spend  $250HKD elsewhere instead as it becomes more difficult for those under 18 to purchase post-ban as black-market sellers are hesitant to sell as they're not over the legal age, even pre-ban. If caught, not only would they receive a potential maximum fine of $50,000HKD and six months of imprisonment, but selling to a minor can result in further punishment ("Hong Kong Police Make First E-Cig Ban Arrests"). Some adolescents may become reluctant to purchase this as it becomes less accessible and inconvenient to source.

Table#4 displays vape-juice had an elastic demand of 1.55 and vape-pods 0.33. The hypothetical non-price determinants (see Table#1) prevented me from expecting an elastic value for vape-juice, even though vape-pods matched my hypothesis. 3 vape-pods (Q1-Qe) and 9 vape-juice (Q1-Qe) units were consumed, irrespective of the 50% and 25% price increases. These results contradict the law of demand, as shown in Figures #4 and #5, where when price increases, quantity-demanded decreases. As e-cigarettes are only available through dealers, e-commerce, or friends, all of which carry risks, young adults stock up on vape-pods/juice when they trade to limit the possibility of getting caught as less interactions between parties limits suspension from authorities. Alternatively, the limited sample-size received within this age group could justify the positive-relationship. Two outliers (see Appendix C) with rising consumption contradict my hypothesis. These results cannot be extrapolated to the whole population.

The inelastic value for vape-pods could have resulted from consumers being less price conscious where they have similar spending habits as adolescents. Whereas, the elastic value for vape-juice can be explained by many young adults being students or recent graduates with low-incomes. As juice is more expensive than pods, this might deter young adults from purchasing as it takes up more of their disposable income. This was also seen for adolescents (allowances), but young adults are also responsible for paying their living fees (e.g. rent, food, etc.).

As shown in Figures #7 and #8 and Table #7, adults had PED values of (-)0.50 for vape-juice and (-)0.15 for vape-pods. This indicates vape-juice demand was inelastic, as the 25% price increase (PE to P1) decreased their quantity from 24 to 21 bottles (Qe to Q1). vape-pod demand was also inelastic, where a 25% price increase (Pe to P1) resulted in a decrease from 27 to 25 pods (Qe to Q1).

The elasticity of both products is explained by e-cigarettes’ addictiveness, specifically nicotine, as respondents in this age group are much older than young adults and adolescents. This could indicate they've been regular e-cigarette users for longer, making quitting vaping post-ban harder due to extended withdrawal periods. Moreover, it may be easier to sell e-cigarettes by black-market dealers post-ban, as they are 18+. As adults will typically receive a middle-high income, price increases take up less of their disposable income. Likewise, convenience, low cost-per-use, and flavour variety also drive inelastic

demand.

Evaluation -

Altogether, the ban had limited effect on e-cigarette use. Even though the PED was inelastic for vape-pods and elastic for vape-juice among adolescents and Young adults, both were inelastic for adults. The consumption patterns of Young adults were utterly different to other groups. As prices rose, demand increased, illustrating an anomaly.

Convenience sampling may also skew data. Being an adolescent myself, most of available respondents' were under 18, limiting the number of respondents aged >18. Moreover, it’s possible that some individuals were not answering the questions truthfully. By the time the survey was distributed, the ban was already in place, indicating that even if consumers were e-cigarettes users, they might be tempted to select zero in terms of quantity consumed, despite the survey being anonymous.

Unintended Consequences of Cigarette consumption -

According to the survey, 16 of 61 applicants reduced their e-cigarette consumption. Nonetheless, 5 of those who vaped pre-ban have started smoking again, as substitutes. Although this was expected for regular users who consume both, what was unexpected for the HKG was for current e-cigarette users to alternative to cigarettes. Mainly because a majority of e-cigarette users are individuals trying to cut down/quit smoking, as they consider vaping to be "safer from smoking" ("Why Do Youth vape?"). Converting to cigarettes just appeared a fallout of nicotine addiction.

The survey found consumers are alternating back to cigarettes post-ban. Cigarettes are existing demerit-goods with NEC. Thus, Figure#9 depicts a free-market economy without HKG intervention. The SMB will be below the PMB as PMB is not reflecting the social benefit. Consumers will maximise their private utility and overconsumption occurs at Qm instead of Qs, resulting in a welfare loss is created (ABC) and thus, market failures occur.

Following the ban, PMB shifted to PMB1, as demand for cigarettes increased, causing price to rise from Pm to Pm1, as they operate as a substitute product for e-cigarettes, with the exception of being legal. As a result local vape businesses were forced to shut down to avoid facing fines or prosecution, limiting the supply of e-cigarettes, whilst increasing the quantity of cigarettes as Qm shifts to Qm1. Therefore, welfare loss will expand from ABC to DBE as the difference between PMB and SMB increases. The increased welfare loss denies the HKG objective of achieving a “smoke-free Hong Kong”, as an unintended consequence of rising cigarette consumption.

The increased consumption may decrease HKG’s budget in the long-run as cigarettes display more detrimental health effects in comparison to e-cigarettes as cigarettes contain tobacco that is burnt and inhaled into the lungs. Whereas although e-cigarette aerosol contains nicotine, which comes from tobacco, this is generally inhaled at far lower levels (Centres for Disease Control and Prevention) (“Is Vaping Harmful?”), explaining why it's often used as an alternative method for smokers. Moreover, the increased demand for cigarettes enlarged the indirect costs on unrelated third parties (ABC to DBE) who continue to suffer from the increased NEC. This includes second/third-hand smoke and productivity loss due to tobacco related diseases, absenteeism and smoke breaks that contribute to workers being less effective. This might not only cause the HKG to devote a greater percentage of their budget towards the healthcare industry to resolve diseases associated with direct/passive smoking, but also potentially towards investments in human capital in an attempt to increase productivity levels and stimulate economic growth.

The level of Government enforcement and monitoring -

As personal consumption is legal, the ban targets producers as regulations implemented discourage them from selling/distributing/importing to avoid prosecution. Nonetheless, black markets may emerge, increasing HKG enforcement costs.

In the month of May, 2 arrests were made reported by HKPF  (“Five Persons Arrested for Suspected Illegal Sale and Possession of Part 1 Poisons and Sale of Alternative Smoking Products”) (Leung) for suspected ATP possession and sale and $10millionHKD worth of e-cigarettes products were seized from incoming travellers (News), yet all products were intended were in small quantities and self consumption. After this month, there were no more arrests made, indicating limited monitoring by the HKPF.

As displayed in Figure #10 below, the primary data exhibits 21 respondents answered No and 5 respondents answered possibly to "If the Hong Kong Government increased advertisement about the ban, will it affect you?". Both these responses indicate the HKG needs to spend more on promoting the ban and educating the populace on health concerns regarding e-cigarettes. Ergo, the ban will be more effective if combined with advertisements to increase awareness.

Evaluation

To conclude, HKG enforcement and monitoring were limited. Banning sales of e-cigarettes through implementing regulations and enforcement by the HKPF only discouraged some producers from continuing to distribute/sell/import e-cigarettes. Nevertheless, because of e-cigarettes’ inelastic nature, the ban’s enforcement might be more effective with other appropriate measures and regulations to eliminateconsumption. Despite fewer e-cigarette producers in HK, the number of users may only fall by a little unless consumer habits are changed. Through an increase in advertisements, fewer individuals may seek to purchase fewer e-cigarette products due to changes in taste and preferences and eventually eliminate consumption.

While the ban effectively reduced e-cigarette consumption, it had an unintended and negative side-effect of encouraging individuals to switch to cigarette consumption, displaying an unexpected outcome of the ban and limited government monitoring that did not account for substituted products.

i -  Conclusion

This investigation evaluated Hong Kong's 2022 e-cigarette ban's effectiveness in reducing demand amongst different age groups through three categories: effect of the e-cigarette ban, impact on three different age groups and degree of government intervention.

In the short-run, the ban was proven somewhat effective in preventing consumption of e-cigarettes. This is demonstrated through the decrease in consumption of 60 to 43 vape-juice and 216 to 150 vape-pods in adolescents, and 24 to 21 in vape-juice and 27 to 25 in Adults. Although rises in consumption of 18 to 25 vape-juice and 100 to 150 vape pods in Young adults, this is justified by outliers in the event of the limited sample size and existence of non-price determinants: addictiveness, substitution, and income. These were used to justify changes in individuals' demand and influence consumers behaviour to maximise their private benefits. This means there's an assumption of ceteris paribus as these factors are hard to quantify and compare, which were not included in these calculations.In the long-term, the ban's effectiveness may be limited as black-markets will continue to exist if demand for e-cigarettes countinutes. Those who stocked up on e-cigarette products pre-ban will eventually run out. This, combined with current demand for e-cigarettes within black-markets, could cause the continuation of high prices. Alternatively, they might decide to alternate towards substitutes as shown by 5 respondents alternating back to cigarettes post-ban. Still, a trade-off exists in the rise in cigarette users until the current level of enforcement and monitoring is increased for e-cigarettes and alternative products to eliminate consumption.

Instead of focusing on producers, the HKGovernment should implement regulations to modify consumer behaviours. The media's use of the availability heuristic to depict e-cigarettes as a healthier alternative to smokes without showing side-effects can alter consumers' attitudes, where they may make immediate judgements based on imperfect information. This is present in adolescents, whose brains aren't fully developed to make discerning decisions and instead make decisions based on their current situation, goal or emotion. Once their brain fully develops, they begin to acknowledge the harmful effects of nicotine, but by then, it may be too late as reliance and addiction have set in. Nonetheless, enforcing educational campaigns that target current smokers and adolescents can limit future generations of smokers. In general, the ban was not as effective as intended. It aimed to eliminate consumption but did not reach the HKG's "Smoke-free Hong Kong" objective.

ii -  Assumptions and Limitations of this Investigation

Due to the investigation's small scale, issues were found that limited the accuracy of this investigation -

i.This investigation assumes there is only a negative externality of consumption but not a negative externality of production. This results in an inaccurate estimate of the external cost.

ii.The survey used was only sent out to a limited portion of HK’s population, specifically adolescents. Results can not consider the consumption habits of all individuals, increasing the margin of error.

iii. The factors affecting PED were hypothesised based on assumptions of stereotypical characteristics associated with this investigation in an attempt to justify changes in demand received in PED values.

iv.The majority of respondents were under 18 and international students due to convenience sampling; thus, the results are not representative of HK's population.

iii -  Further Improvements

i.As the factors affecting PED were hypothetical, I could have asked respondents in the survey why they were increasing/reducing consumption to obtain measurable evidence.

ii.A greater sample size could have been used in Age groups 18-25 and >25 to avoid convenience sampling. To do this, I could have also conducted a verbal survey of random pedestrians within the CBD (example) or on more online platforms (e.g. Gmail, Facebook, Linkedin, Instagram) to increase access by all age groups.

iii.The survey could have been shortened as not all questions in the survey ended up being used in this investigation. Although they gave me a general perspective of respondents' behaviour post-ban, shortening the survey could have encouraged more people to participate as it keeps respondents engaged and takes less time to complete.

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*Note the data below was calculated using Microsoft Excel *Note all rows with with the symbol “-” illustrate undefined values

Worked PED Calculations for Adolescents, Young Adults, Adults

i. Adolescents -

Percentage change in Quantity-demanded of vape-pods -

\(\frac{150-216}{216}×100=(-)30.56\%\)

Percentage change in Price for vape-pods -

\(\frac{150-100}{100}×100=50.00\%\)

Price Elasticity of Demand -

\(\frac{(-)7.41}{50.00}×100=(-)0.15\)

Price Elasticity of Demand -

= The PED is inelastic as the value is between (-1) and 0

Percentage change in Quantity-demanded for vape-juice

\(\frac{43-60}{60}×100=(-)28.33\%\)

Percentage change in Price for vape-juice

\(\frac{250-200}{25.00}×100=50.00\%\)

Price Elasticity of Demand

\(\frac{38.89}{25.00}×100=(-)1.56\)

= The PED is Elastic as the value is above (-1)

ii. Young Adults

Percentage change in Quantity-demanded of vape-pods -

Percentage change in Quantity-demanded for vape-juice

\(\frac{21-24}{24}×100=(-)12.50\%\)

Percentage change in Price for vape-juice

\(\frac{250-200}{200}×100=25.00\%\)

Price Elasticity of Demand

\(\frac{(-)12.50}{25.00}×100=(-)0.50\)

= The PED is Elastic as the value is above (-1)