Often times, government policies are ostensibly about providing knowledge, when they are actually about nagging. Consider cigarette warning labels. They now take up more space on the packaging than they did in the past, but they still provide surprisingly little knowledge about risks. Instead, there has been a trend of making them disturbingly graphic. Many countries require large pictures that show the disgusting impact that cigarettes can have. Many of these pictures cannot be considered as providing relevant information. For example, showing that diseased lungs look disgusting is hardly relevant for decision making; after all, lungs are generally shielded from view, so most people do not have strong preferences over what their lungs look. These types of pictures are justified on the grounds that written messages like "Smoking Kills" are no longer effective (in the sense of continually decreasing smoking rates). While scientific information will dissuade some potential smokers, other people will go ahead and smoke anyway.
Perhaps some people have cognitive limitations and can only process emotional or pictorial information. However, the main impact of graphic pictures is probably to make the experience of smoking less pleasant. Most people do not want to look at pictures of diseased bodies. By forcing smokers to look at gross pictures a dozen times a day, they get less enjoyment from smoking. Likewise, the emotional graphics of second-hand-smoke victims serve as not-so-subtle nagging. In this way, gross pictures can be a substitute for taxing cigarettes (another common way of making smoking less attractive).
To the extent that educating, nagging, disgusting, and taxing smokers persuade them to quit, all these approaches leave would-be smokers healthier. However, most new measures will have only limited success, so it is important to consider the impact that a policy has when people persist in smoking. Taxation makes smokers worse off, but it generates revenues that make non-smokers better off. Nagging and disgusting smokers makes the smokers worse off with no corresponding benefit to non-smokers. For this reason, nagging warning labels might be less efficient than taxation.
The United States was ready to require pictorial warnings in September 2012, but implementation was delayed due to litigation from cigarette companies. The courts ruled that the graphic labels could only be imposed if evidence existed that the labeling actually reduced smoking. Towards this end, researchers used auctions to demonstrate that pictorial labels decrease demand. How does this work? Researchers offer to pay smokers to participate in a short experiment. By paying the smokers sufficiently for their time, researchers get broad participation that hopefully eliminates the impact of volunteer bias. The study used a variation of the second-price auction. In a standard second-price auction, participants bid, and the highest bidder pays the price of the second highest bidder. What is the optimal strategy in this type of auction? Each participant should bid the highest price at which she would be willing to purchase the item. This allows the researchers to infer each smoker's exact willingness to pay. In this type of research, it is not necessary that participants actually bid against each other. Instead, a randomly chosen number can serve as the highest competing bid. Although the competing bidders are simulated, the auction is genuine in the sense that outbidding the simulated bidder results in an actual transaction: cigarettes are exchanged for cash. This implies that people have an incentive to reveal their true preferences since actual money is involved.
What did the experimental auction show about cigarette warnings? Extending the space given to a text warning had a minimal impact on the demand for cigarettes. However, adding a disgusting picture of mouth cancer reduced willingness to pay for cigarettes by 12 percent. The graphic picture along with plain packaging reduced bids by 17 percent.