Smoking in Restaurants: A Reply to David Henderson

“Smoking in Restaurants: Who Best Sets the House Rules?†by David Henderson, Econ Journal Watch 4(3), is a comment on our paper “Smokefree Laws Increase Restaurant Values,†Contemporary Economic Policy 22(4). Henderson asserts that restaurant owners can internalize all of the costs related to second hand smoke. There is, however, no mechanism by which a restaurant owner can compensate a patron for any health costs related to second hand smoke, therefore it is not possible for the owner to have completely internalized the costs of the externality imposed by the smoker. Henderson also notes that because we use a ratio (the dependent variable was the Price to Sales ratio (P/S)), the positive effect we found could just as easily come from a reduction in sales as an increase in price. This statement demonstrates a lack of knowledge of the previous literature that has repeatedly found either no or positive effect on sales associated with smokefree laws.