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Tobacco: Inelastic Demand For Cigarettes

Decent Essays
Tobacco tax increase urged by parliamentary group Tobacco is a demerit good, where social costs of consumption are greater than private costs to the individual i.e. negative externalities. Negative externalities of consumption produced make the marginal social benefits in each case less than the marginal private benefits. The private utility is diminished by the negative utility suffered by the third party. Smokers have some private benefits of smoking, but they are creating external costs for other people. The costs to other people (second-hand smokers) are significant and include a variety of illnesses. Consumers, because of the free market would maximize private benefit to consume at MSC=MPB. Cigarettes would be over-consumed, because…show more content…
Inelastic demand is if there is a change in the price of a product it leads to a proportionally smaller change in the quantity demanded for it. This mean that tax alone is not very effective in reducing quantity demanded. If the taxes would be raised too much, people would start to look at other alternative ways of getting cigarettes (black market). Cigarettes have price inelastic demand because of their addictive properties, therefore an increase in price has only made a minimal change in quantity demanded (Q2 to Q1). For regular consumers this is a burden since the price has increased, but consumers still highly demand this commodity even at a higher price because of its inelasticity. Furthermore, a new market equilibrium was formed (E1 to E2) due to the change in price and the shift in the supply curve, which producers are forced to follow. Generally, price inelastic commodities are primary targets for high rate taxation during times of economic crisis, as a lot of tax revenue is…show more content…
Government could provide education about the dangers of smoking and also fund negative advertising in order to reduce demand for cigarettes. The revenue from tax imposing could be used (£100m). There is no guarantee of effectiveness of education and advertising in terms of reducing cigarette consumption, but the reduction in consumption would be larger with both tax + health campaign. Nevertheless, using the tax alone to lessen cigarette consumption may not be sufficient as smokers will always look for substitutes to their vice. The ban on smoking in public places has cut the external costs borne by non-smokers. The warnings on cigarette packets have changed some public perceptions. People are not the best judges of their own welfare, so the government intervenes to discourage the production and consumption of demerit goods (cigarettes in this case)-for example age limits for smoking. Advertising ban would be also useful, packaging shouldn’t be attractive for people, cigarettes should be hidden from the view of a consumer, warnings should be everywhere and more influencing. Also it would be good to ban cigarette consumption in pubs, restaurants, clubs and in cars with children. I think that increasing the price of cigarettes is a quite effective policy tool for reducing smoking participation and consumption among youth, young adults and persons of low socioeconomic status. Higher cigarette
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