Negative Externalities Of Consumption Of Tobacco

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