Article that I chose is about raising of indirect taxes on cigarettes in China. This is an example of government intervention in order to try to reduce smoking in China. Cigarettes are a demerit good. Demerit goods are any goods with negative externality of consumption, which means that demerit good is a good that has a bad impact on consumer and society. The market for cigarettes is perfect example of market failure.
MSB- Margin of social benefit
MPB- Margin of private benefit
MSC- Margin of social cost
MPC- Margin of private cost
On this graph we can see that MPB is higher then MSB because cigarettes are harmful to society and also because consumers and producers only consider private benefits. Difference …show more content…
By increasing indirect taxes to 11% MPC shifts upwards and by increasing it enough Chinese government expects MPC to reach the social optimum and eliminate market failure in China. Welfare loss in China will be eliminated if MPC + Tax is equal to negative externality of consumption. Rise in tax will result in higher price of cigarettes for consumers, which means decrease in a revenue for producers. Government revenue will also increase due to higher prices.
ADVANTAGES AND DISADVANTAGES OF INCREASING INDIRECT TAXES
First advantage of increasing indirect smoking in China is possible reduction of smokers in a long period of time, because smokers will have time to switch to other alternatives, such as e-cigarettes. Second advantage and the main one of increasing indirect taxes is increase in a government revenue. Since there are 300 million smokers in China government revenue will increase enormously and it can be used to fund many other government projects, which are beneficial to society. Government can also use this revenue in order to pay for some anti-smoking advertising. China is also the biggest producer of cigarettes in the world , so by increasing indirect taxes, the production of cigarettes will
MSB- Margin of social benefit
MPB- Margin of private benefit
MSC- Margin of social cost
MPC- Margin of private cost
On this graph we can see that MPB is higher then MSB because cigarettes are harmful to society and also because consumers and producers only consider private benefits. Difference …show more content…
By increasing indirect taxes to 11% MPC shifts upwards and by increasing it enough Chinese government expects MPC to reach the social optimum and eliminate market failure in China. Welfare loss in China will be eliminated if MPC + Tax is equal to negative externality of consumption. Rise in tax will result in higher price of cigarettes for consumers, which means decrease in a revenue for producers. Government revenue will also increase due to higher prices.
ADVANTAGES AND DISADVANTAGES OF INCREASING INDIRECT TAXES
First advantage of increasing indirect smoking in China is possible reduction of smokers in a long period of time, because smokers will have time to switch to other alternatives, such as e-cigarettes. Second advantage and the main one of increasing indirect taxes is increase in a government revenue. Since there are 300 million smokers in China government revenue will increase enormously and it can be used to fund many other government projects, which are beneficial to society. Government can also use this revenue in order to pay for some anti-smoking advertising. China is also the biggest producer of cigarettes in the world , so by increasing indirect taxes, the production of cigarettes will