Cigarettes: Article Analysis

The article ' 'Smokers to pay more for cigarettes as tobacco taxes rise by 13.7 per cent ' ' was published on Monday, 1 Sep 2014. It is about an indirect tax imposed on cigarettes. The price for cigarettes rose because the government imposed a 13.7 per cent tax. Price for cigarettes in Australia is higher than in most countries and the article estimates that by 2016, one cigarettes will cost $1. This will give the government about $13 from every packet sold. This article perfectly shows an example of a negative externality of consumption and the actions that the government takes in order to reduce the negative externality. Negative externality is one kind of the market failure. This means that the resources are not allocatively efficient

When a person smokes, he receives a satisfaction; however people around him, who are forced to breathe the smoke, do not

P receive a benefit. In fact, there is a damage to those, who are exposed to secondhand

Q smoking. It is also known as third parties. The cost to the third party might include not only the bad smell of the smoke but diseases such as cancer or asthma. The smokers however do not care about this and maximize their private benefit by consuming at MSC=MPB. This is where the negative externality appears and it is clearly shown in the diagram 1. While the socially optimal point would be at Q and P, the actual level of consumption and price is higher (Qe,Pe). The reason many consumers do not care about the MSB is that MSC ( marginal social cost) is equal to the MPC ( marginal private cost).

In order internalize the externality, which means making consumers pay for the negative effect, the government imposes am indirect tax on the good that produces the negative externality. In theory, it will move the consumption of cigarettes to the socially efficient output.By imposing a tax, the government makes consumers pay more for a good, which increases the MPC by the amount of the tax. Therefore, MPC is MSC + tax. As a result, consumers decrease

This is what the government had done according to the article. However, it is very hard to decrease a consumption of goods such as cigarettes because they are addictive. Addictive goods have an inelastic demand, meaning that a big change in price will change the quantity demanded by a small proportion. Hence, the consumption of cigarettes was not decreased by much. However, there is a difference in the change in consumption of cigarettes over time. This is because the longer time period there is the more elastic the change will be. Meanwhile, the government’s revenue had risen, and it can now use the money for providing education on the dangers of cigarettes. This does not have a significant impact on the consumption of cigarettes; however, together with taxes it could decrease the consumption greatly. Another way to internalize the negative externality is by making laws that forbid smoking. This is what many countries had done nowadays; smoking is prohibited in many public places. This has a much higher impact on the consumption of cigarettes. Smoking in a prohibited place both gains money for the government through fines and increases the MPC for those who smoke. Also, it decreases the MSC because there are now less people exposed to secondhand smoking. This means that the government can now spend less money on the effects of the negative externality, such as treating cancers, and