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Definition of Natural Experiment

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Definition: If economists could experiment they could test some theories more quickly and thoroughly than is now possible. Sometimes an isolated change occurs in one aspect of the economic environment and economists can study the effects of that change as if it were an experiment; that is, by assuming that every other exogenous input was held constant.

An interesting example is that of the U.S. ban on the television and radio broadcast of cigarette advertising which took effect on Jan 2, 1971. The ban seems to have had substantial effects on industry profitability, the rate of new entrants, the rate of consumers switching brands and types of cigarettes, and so forth. The ban can be used as a natural experiment to test theories of the effects of advertising.

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