The Externalities of Smoking

History has proven that government penalties, in the form of taxes, deter smoking. The 2000 U.S. Surgeon General’s Report, Reducing Tobacco Use, found that raising tobacco-product prices decreases the prevalence of tobacco use, and tobacco tax increases produce significant long-term improvements in health. From its review of existing research, the report concluded that raising tobacco taxes is one of the most effective tobacco prevention and control strategies (7). Along with price increases, mass-media campaigns and smoking bans have made cigarette smoking pretty much unacceptable in today’s society. “Today, approximately 22 percent of adults age twenty-two and older are smokers, compared with 33 percent in 1979” (Thorpe 1440). It is clear, from these examples, the use of penalties to deter the unhealthy behavior of smoking is a successful intervention.

The purpose of this economics report is to illustrate the economic concerns and arguments around smoking in Australia and the methods of taxing aimed at reducing the smoking rate. The report will use a variety of research articles, economic theories and models to report on this issue so that the CEO of the Cancer Council of Australia has a thorough understanding.

In the article ‘Cigarette tax hike sparks panic buying’, Hall (2010) discusses the effects of tax increase on cigarettes. The government has decided to raise the tax on cigarettes by 25%, costing $2.16 more on a pack of 30 cigarettes. This government intervention is an attempt to stop people from smoking and reduce the health bill caused by those who smoke. The increase in tax is expected to save $5 billion more of the people’s tax dollars and the government decided that it will be put into a better use for its health and hospitals reparations. This contractionary fiscal policy is expected to reduce the total tobacco consumption by approximately six percent and drive down the number of smokers by 87,000.

The marginal benefit and marginal cost of cigarettes are in competitive market equilibrium without government intervention, however, the negative social cost of smoking to society would likely lead to market failure without the involvement of the government (reference). Tobacco not only affects the health of its consumers, it can also affect the health of non-smokers who involuntarily inhale second-hand smoke (reference). With the continuation of tobacco consumption, society faces increased tax rates, a loss of productivity and an opportunity cost from patients suffering tobacco-induced health problems, potentially robbing others with unpreventable conditions from the medical resources and treatment they require. Each year Australians spend

We study the social interaction of non-smokers and smokers as a sequential game, incorporating insights from social psychology and experimental economics into an economic model. Social norms affect human behavior such that non-smokers do not ask smokers to stop smoking and stay with them, even though disutility from smoking exceeds utility from social interaction. Overall, smoking is unduly often accepted when accommodating smoking is the social norm. The introduction of smoking and non-smoking areas does not overcome this specific inefficiency. We conclude that smoking bans may represent a required policy.

Economic analysis of the effects of tax policy on cigarettes is motivated by the desire to understand how economic forces influences tobacco consumption. This essay will demonstrate how tax policy is a well recognised and supported method of reducing tobacco consumption and will show how tax policy is used to influence supply and demand of tobacco products. The tax on cigarettes in Australia, often called excise, is imposed on cigarette manufacturers. The excise is then passed on to consumers with the effect being a higher price and lower demand.

Cigarette is a demerit good (a good whose consumption is considered unhealthy or socially undesirable due to the perceived negative effects on the consumers) which the government wants to reduce so that the consumers do not harm themselves. (Welker, 2011) Cigarette is a negative externality of consumption (A consumption where someone other than the buyer or seller experiences a loss as a result of the consumption). Therefore the market of cigarette is an example of market failure, which is any situation where the allocation of resources by a free market is not efficient. There are three solutions of negative consumption externalities; legislation or regulation, taxation and advertising. Taxation (a charge placed on an individual or firm that is payable to the government under punishment of law) on

There are several ways through which government can control the usage of Tobacco. One of them is that government can impose huge tax on tobacco products by which people will move out of tobacco. It can also be argued that government should ensure smoking should not be high-hand in advertisements

When government reduces tobacco use and post calories counts on restaurant menus, it will reduce consumer pleasure. When government limits quantity of tobacco use, consumers can only buy fewer quantity of tobacco. It will decrease consumer satisfaction. Regulation will lose consumer surplus which means pleasure lose by someone who curtails an enjoyable behaviour. If consumers quantify satisfaction as dollar value, consumer wills suffer lost enjoyment amounting billions of dollars. Furthermore, decrease in consumer surplus can be represented as decrease in quality of life. It would be hard for smokers to quit smoking right away. Moreover, a lot of consumers would get stress every time as they select food in restaurant. With lack

The establishment of a cigarette tax policy would contribute to the reduction of cigarette consumption, because the equilibrium price of the market would increase and considering the consumer's budget constraint, the quantity demanded would decrease. In this sense, the demand model is optimal to represent the establishment of this policy and the reduction of cigarette consumption as a consequence. Because this model specifies the demand equation so that the quantity of cigarettes demanded is a function of cigarette prices, consumer income, and tax policies.

The above graph shows that at the original price level(P), the marginal private benefit(MPB) of cigarette is greater than the marginal social cost (MSC). This means that cigarette is over-consumed and the green triangle between MSB and MPB shows the welfare loss. The government may decide to increase the indirect tax to cigarette as the cost of cigarette(healthcare) outstrip the taxation it collects. The supply curve shifts to the left from S=MPC=MSC to S+tax. The quantity consumed will decreases from Q to Q1 and the problem of over-consumed will be solved as the yellow triangle that represents the decrease in consumption is equal to the original welfare loss triangle.

The external costs of smoking are ignored by the smoker, thus social benefits (MSB) are less than private benefits (MPB). The MSB curve is therefore to the left and below the MPB curve. The socially optimal amount of cigarette consumption is at intersection A, where MSC=MSB. This is also where the market is in equilibrium. However, MPB moving to the right of MSB and forming Q1, results in welfare loss, shown by the shaded grey

A new study from the University of Minnesota Run by R.J. Reynolds in the economics department found in 2011 That in all the states that have significantly raised their cigarette taxes 10 percent , Almost all pack sales have gone down sharply, Except the least selling brands. While some of the decline in pack sales comes from most interstate smuggling and from smokers going to other lower-tax states to buy their cigarettes, reduced consumption and will save your live with health benefits by 7 years from smokers quitting and cutting back plays a more powerful role. R.J. Reynolds says, “If prices were 10% higher, 12-17 incidence youth smoking would be 11.9% lower”( Reynolds 1). It is clear that price has a pronounced a very large impute on smoking of teenagers and young adults, that the goals of reducing teenage smoking and balancing the budget would both be served by increasing the Federal excise tax on cigarettes. Even though there are other bigger factors to look up to , Looking at all the big trends from cigarette price trends and overall consumption in the U.S. from 1969 to 2010 shows that there is strong connection between increasing cigarette taxes , decreasing consumption and major health benefits. Reynolds says Smokers are two to four times more likely than nonsmokers to develop coronary heart disease. Even low levels of tobacco exposure, including occasional smoking or

Health economics can be used also prospectively together with the programmer or individually to inspect the influence of health promotion and health promotion procedures. For example, independent examination of the influence of a strategy can be used to measure the effect of tax changes on smoking behavior between unalike social groups. review the likely influence of an increase in the excise tax amount on cigarettes on the number of adolescent smokers, telling that a 23% rise in the price of cigarettes would result in a discount of 16% in the number of adolescents who would then smoke, and a decrease in the number of cigarettes smoked by adolescents of 14% ( December 1,

(Internal Summary/Transition: Smoking can not only ruin your health, but also cause economic destruction. We will examine the impact of smoking on the economy.)