Negative Externalities Of Consumption Of Tobacco

Good Essays
Tobacco is a demerit good, which means that its consumption provides negative externalities towards society. Negative externalities of consumption refer to external costs created by consumers. For example, consumers smoking cigarettes will affect the health of others. They are a type of market failure. A market failure occurs when the allocation of resources are not efficient. The upcoming diagram shows negative externalities of consumption of tobacco. The diagram above is presenting that consumers are only considering their private utility, and that they are forgetting about the negative externalities they are creating. Negative externalities cause markets to manufacture larger quantities than is socially desirable. They are consuming tobacco …show more content…
The diagram above is demonstrating how when the indirect tax is raised, it shifts the MSC curve to the left (To MSC+Tax). The effects of the indirect tax are that it decreases the supply because it shifts the market equilibrium up raising the price for tobacco. The quantity demanded will decrease as well. However, raising the tax could lead to illegal markets forming. Tobacco also has inelastic demand, shown by the following diagram. The diagram above is showing the shift caused by the tax, from S to S+Tax, and how Tobacco has inelastic demand, which can be seen by the steepness of the demand curve. It is indicating how an increase in the price of Tobacco will lead to a smaller change in the quantity demanded, as Tobacco is addictive with few substitutes. Consumers want to continue buying it in the beginning as it takes time from them to get used to not purchasing it. Relating back to the article, raising the tobacco tax has advantages and disadvantages. The advantages are that it would improve the health of Chinese, thus leading to a decrease in healthcare costs. This would provide more leftover revenue, which could be used for other investments, such as, finding cures for …show more content…
This would decrease the amount of consumer spending, which thus leads to a decrease in the amount of tobacco being sold. All of this would lead to an increase in the rate of unemployment. The government could prevent illegal markets by imposing fines and setting laws to producers doing so. They could also prevent an increase in the rate of unemployment by not setting the tax too high. In the short run, the tax rising will probably not decrease consumption by much as adult consumers are already addicted to tobacco and their bodies are used to it, so they will most probably continue to buy tobacco, even if it means they have to pay more. But in the long run, consumption would decrease as younger people will not want to pay higher amounts for tobacco and it is easier for them to stop as their bodies are not used to tobacco as much as adults. The government could produce negative advertisements and show them to teenagers encouraging them to not start smoking and showing the side effects of it. By raising the tobacco tax, various stakeholders will get affected. The government will benefit, as they will earn more money, which they could use for other

Related Documents

  • Decent Essays

    Tobacco companies can sell more, but smokers can buy less at the new price level. This moves the market out of equilibrium (Mankiw, 2012: 116-117). It is also necessary to say, that price floor has more significant effect on reducing the demand in a case with the price elastic good. The demand for cigarettes tends to be price inelastic. This mean, price floor will not reduce the willingness to buy tobacco products significantly.…

    • 907 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    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…

    • 726 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Cigarettes In China Essay

    • 750 Words
    • 3 Pages

    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.…

    • 750 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Anti Tobacco Advertising

    • 1252 Words
    • 5 Pages

    The number of deaths and illnesses related to tobacco smoke will drop while the number of jobs and employment because of new industries opening up will increase. This is seen as a win on both angles ("Ban on Tobacco Ads by the Government of…

    • 1252 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    The decision to ban addictive, harmful tobacco products should not be plagued with failed results of past prohibition, fear of job loss or concerns of financial gain. Perpetuating sales of a toxic product such as cigarettes does not serve the greater good of the public and puts monetary gain ahead of national health. Deceptive arguments put forth by profiteers is becoming more apparent and is losing momentum in the justification of the distribution of tobacco products. The influence of large cooperation is warping the view of the public for self-serving benefits of money and power. Creating toxic clouds of misperception that loom over the head of the consumer, tobacco companies and federal government convincingly state their agenda as profitable…

    • 840 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Goodman’s article discusses the positive affects that a tax raise on cigarettes can do for the economy. Tax revenue generated from cigarettes can be used towards helping fight illegal drug trade and drug abuse. The scholarly publication on “The Impact of Tobacco Tax Cuts on Smoking Initiation Among Canadian Young Adults,” also concluded that increased taxes can help to stop younger people from purchasing cigarette and tobacco products, which in the long run stops younger people from developing addictions. Positive outcomes come from government regulations, acts and policies as well. With the government controlling marketing and selling of cigarettes, less people are exposed to cigarettes and thus less people get hooked on them.…

    • 1106 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Cigarettes: A Case Study

    • 811 Words
    • 4 Pages

    The demand for tobacco products is not as elastic as demand for other products. The increase of the price of cigarettes is because the rate of people smoking and the number of tobacco products that loyal smokers still smoke ("Price Elasticity of Demand For Tobacco Products", 2016). Due to the growth of taxation, the statistics of the usage of cigarettes are going down. The rise in taxes prevent non-smokers from beginning, motivate smokers to quit, and to influence former smokers from smoking cigarettes again ("Price Elasticity of Demand For Tobacco Products", 2016). Expansion in cigarette taxes engenders more expensive cigarettes for people.…

    • 811 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Sellers have an excess of supply and consumers are not buying the product for the original price. In this case, sellers would have to start selling their product at a lower price or on sale. The equilibrium price would be lowered along to the product price. Before lowering prices, the output sales would be lower because no one is buying the product so there is no selling. Once the prices go down more buyers would want to buy the product due to the cheaper price causing output sales to…

    • 714 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    It will make the sellers increase he cigarettes price also so that they could get the profit from there. This will reduce the number of smokers when they can’t afford to buy the cigarettes. They will attempt to quit smoking. This would affect the woman especially the pregnant mother because it will save thousand numbers of newborn baby from suffer many related health consequences after their birth. The increasing of the manufacturing price that happen in recent years do affect in sales of tobacco product (Reynolds, 2008).…

    • 1030 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Nevertheless, the flexibility of indirect tax is relatively high compared to direct tax. If the inflation is too high, it can be modified more easily than direct tax as direct tax can only be adjusted once a year at the time of Budget. Coupled with this, indirect taxes have a minor disincentive effect towards individual work versus leisure choices. As such, a higher indirect taxation can be introduced in order to allow a reduction in direct taxation. For example, the demand curve of those demerits good normally tends to be very inelastic, especially for smoking which is addictive.…

    • 792 Words
    • 4 Pages
    Decent Essays