Get Ready For $11-a-pack Cigarettes!!!

Based on the news from CNNMoney.com (http://money.cnn.com/2010/06/22/news/economy/cigarette_tax/index.htm), the article is about the price of cigarette which had increased to $11 per pack due to the impact of tax on cigarette. Although the cigarette is getting more expensive, there is still a huge number of smokers who are buying the cigarette, therefore, we can consider that cigarette have an inelastic demand. 

Demand refers to the goods that we want it, can afford to buy it and have a definite plan to buy it. Based on the law of demand, it states that the higher the price of a good, the smaller is the quantity demanded when other factors remaining the same. 

            The price elasticity of demand (PED) is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. The graph above (Graph 1) show an inelastic demand curve, whereby the percentage change in price is larger than the percentage change in quantity demanded.

            When the government imposed tax on cigarette, this will shift the supply curve to the left as the cost of production is increases and the producers will reduce the quantity of supply. In Graph 2, a pack of cigarette only costs $6.00 before taxation. After the imposing of tax, the price of cigarette paid by buyers is increasing to $11 per pack and the price of cigarette received by the sellers is reduced to $5.15 per pack. The total amount of tax on a pack of cigarette is $5.85, where the tax of $5 per pack is paid by buyers and the rest of tax ($0.85) is paid by the sellers. In others words, we can say that most of the tax on cigarettes are paid by the smokers instead of producers.

            Besides, efficient market refers to marginal social benefit equals to marginal social cost and the total surplus (the sum of consumer surplus and producer surplus) is maximized. Graph 3 shows the inefficiency of a tax on cigarette. The quantity demanded is reduced and have the impact of rising in buyers’ price and lowering the sellers’ price. 

            The demand curve, D, show marginal social benefit, and the supply curve, S, shows marginal social cost. The shaded region in grey shows the deadweight loss, which is the loss of consumers’ surplus and producers’ surplus from the imposition of tax. The blue area indicates the consumer surplus and the red area shows the amount of producer surplus. However, the tax revenue earned by government also takes part of the total surplus, which is shown in yellow rectangle of the graph. This situation happened when marginal social benefit exceeds marginal social cost, which also called as underproduction.  

            Furthermore, cigarette is one of the examples of a negative externality as it is a source of causing pollution. Negative externalities are one of the factors of market failure and this occurs when production or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. Due to the smokers and the producers do not take the effect of pollution into account; there are negative effects that arise from pollution. 

           In graph 4, in a free market cigarette addicts will maximise their private utility and consume the amount where the marginal social cost (MSC) intersect the marginal private benefit (MPB) at $15 will 100 millions packs of cigarette. However, the social equilibrium point is at the point where MSC equals to MSB. This means that cigarette is over consumed by 40 millions pack of cigarette and occurred a welfare loss to the society, which is shown in pink shaded region as the problem of over consumed, will lead to serious air pollution in the environment. 

            As smoking can cause air pollution which is unhealthy to the society, government should release tradable pollution permits in order to overcome this problem. Those permits will allow companies to pollute until a certain level so that it will not cause serious pollution. Companies can also buy, sell and trade these permits in the market. In New York, the Department of Environmental Conservation had come out the air pollution control permit program as an action to control the pollution. Besides, government can also impose pollution taxes which mean that companies have to pay money or taxes for the pollution they produce. This may reduce the pollution condition. However, the cost of pollution is difficult to be calculated. 

On the other hand, the reasons why there are taxes on goods are because the government want to increase the tax revenue, reduces the consumption of the goods or just as expenses which will not harm both buyers and sellers. Based on the article, the main purpose of government imposing a higher cigarette tax is to generate more tax revenue in order to reduce the consumption of the cigarette by using the tax revenue to support the healthcare programs which bring benefit to the society. 

However, according to the recently news on price of cigarette in New York which is from nypost.com, it concluded that those high cigarette taxes only make the lower income and younger people even poorer. It is because the smokers are still smoking by buying the cigarettes at high prices. Although there is a decrease in number of smokers but the main reason of those smokers quit smoking is because of health-conscious, not due to the high cigarette taxes. 

             Cigarette (smoking) can cause death and affect our health condition. Without smoking, there will be less pollution, less death rates, less hospital treatment and healthier workers. However, if the industry of cigarette is removed, it will increase the number of unemployment labour, reduce the tax revenue of government and more government expenditure on longer lives and pensions. 

            A reasonable and acceptable amount of tax on cigarette may result in reducing the quantity supply and quantity demanded in cigarette. This can improve the living standard and health condition of consumers as there are less pollution and fewer smokers in the society, which is benefit to everyone. However, if the government impose an extremely high amount of tax on cigarette, it may have resulted in negative effect to the society such as rate of crime in society will increase, more sellers are selling cigarette illegally and else.  Therefore, amount of taxes imposed can affect society differently.