This study attempts to analyse the efficiency of production, the degree of distortion in the markets and the pattern of incentives for smallholder tobacco growers in Songea, Tanzania. A survey was conducted on a sample of tobacco growers in Songea district, and secondary data collected from key organisations in the industry. A Policy Analysis Matrix (PAM) of the tobacco production and marketing system was constructed so as to determine the private and social profitability of the system, distortions in the markets and the efficiency of resource use in the pursuit of maximizing income. Since PAM is a static model, a sensitivity analysis to explore the effect of potential changes in various factors that influence the profitability of the enterprise was also conducted.