This article discusses how the Korean government has decided to impose indirect taxation on cigarettes in order to lower smoking rates in Korea.
Cigarettes are a demerit good that creates negative spill-over effects like ‘premature deaths’ and ‘financial issues’. The market for cigarettes is an example of market failure because resources are put into producing cigarettes instead of products with positive externalities to the society. (Allocative inefficiency)
Negative consumption of cigarettes
Cigarette consumption places the MSB curve below MPB curve. The vertical difference between MPB and MSB curve represents the external costs. The welfare loss shown in blue comes from the negative externalities caused by consuming cigarettes …show more content…
This will decrease the supply of cigarettes, MPC curve will shift inwards to MPC + tax. If the amount of tax imposed equals the size of external cost then the market equilibrium will return to the social optimum level of output (from A to B) and consumers will be paying a higher price (Paftertax). This allows allocative efficiency to be achieved again (MPB = MSB) and society will regain the benefits from the welfare loss. But it’s difficult to measure the value of the negative effects of smoking so it’s hard to say if the amount of tax is the right amount to correct the negative …show more content…
First, the decrease in the amount of disposable income for consumers; as the price of cigarettes is relatively high it will impact of the smokers’ disposable income and decreases their living standards. Second, indirect tax is a type of regressive tax. It’s a fixed amount of tax that makes a larger percentage from low-income people than from high-income people. This may increase income inequality as indirect tax hits lower-income individuals harder than it does higher-income individuals. Third, based on the analysis of low price elasticity of cigarettes the outcome of reducing smoking rate may only be effective in the short run. In the long run the outcome may not be as effective as the PED might be higher because consumers will have time to switch their consumption habits. Last, it increases cost of production for producers this may leads to higher unemployment rate. However, the Korean government can use this tax revenue to cover government’s fiscal deficit or funding merit goods like hospitals. Also, the reduction in smoking rate can possibly be greater in the long run as PED of cigarettes might increase as time goes because consumers will have time to quit
Cigarettes are a demerit good that creates negative spill-over effects like ‘premature deaths’ and ‘financial issues’. The market for cigarettes is an example of market failure because resources are put into producing cigarettes instead of products with positive externalities to the society. (Allocative inefficiency)
Negative consumption of cigarettes
Cigarette consumption places the MSB curve below MPB curve. The vertical difference between MPB and MSB curve represents the external costs. The welfare loss shown in blue comes from the negative externalities caused by consuming cigarettes …show more content…
This will decrease the supply of cigarettes, MPC curve will shift inwards to MPC + tax. If the amount of tax imposed equals the size of external cost then the market equilibrium will return to the social optimum level of output (from A to B) and consumers will be paying a higher price (Paftertax). This allows allocative efficiency to be achieved again (MPB = MSB) and society will regain the benefits from the welfare loss. But it’s difficult to measure the value of the negative effects of smoking so it’s hard to say if the amount of tax is the right amount to correct the negative …show more content…
First, the decrease in the amount of disposable income for consumers; as the price of cigarettes is relatively high it will impact of the smokers’ disposable income and decreases their living standards. Second, indirect tax is a type of regressive tax. It’s a fixed amount of tax that makes a larger percentage from low-income people than from high-income people. This may increase income inequality as indirect tax hits lower-income individuals harder than it does higher-income individuals. Third, based on the analysis of low price elasticity of cigarettes the outcome of reducing smoking rate may only be effective in the short run. In the long run the outcome may not be as effective as the PED might be higher because consumers will have time to switch their consumption habits. Last, it increases cost of production for producers this may leads to higher unemployment rate. However, the Korean government can use this tax revenue to cover government’s fiscal deficit or funding merit goods like hospitals. Also, the reduction in smoking rate can possibly be greater in the long run as PED of cigarettes might increase as time goes because consumers will have time to quit