Microeconomics: Tax, Price and Cigarette Smoking - Assignment Example

Microeconomics: Tax, Price and Cigarette Smoking Contents Contents 2 Answer 3 Answer 2 3 Answer 3 5 Answer 4 6 Question 5 8 Question 6 8 References 9 Answer 1 In the year 2008, when the taxes on cigarettes were increased by 62 cent per pack the sales of cigarettes decreased by 10%. This shows the impact of taxes on cigarettes. The tax is devised in such a way to discourage smoking that the consumption of cigarettes has decreased by 20% according to a report. The factors that affect the size of the tobacco market is the tax rate that is imposed on cigarettes in the country and the smoking habits of the newer younger generation as a result of anti-smoking campaigns (Mankiw, 2012, p.72). For the person who smokes cigarettes, it is a good commodity. Hence, the Price Consumption curve would be downward sloping one as in the figure above. But the slope will be a flat one because although the price goes up, the consumption does not get reduced at the same rate. Answer 2 The difference between a young smoker and an adult smoker is that the former can reduce the level of smoking as it is not a habitual activity for him hence cigarettes will be treated as a normal good for him. So when the price of the cigarette increases the young consumer can reduce the consumption. Hence the demand curve would be an elastic one (Gottheil, 2013, p.101). On the other hand, for an adult smoker cigarette consumption would not vary with changes in the prices because it would be an addiction for him and hence even if the price is high he would not be able to reduce the consumption of cigarettes. The demand for cigarettes for an adult would be inelastic. In the above figure, the producers of cigarettes face a perfectly inelastic demand curve from the adult smokers but a relatively more elastic demand curve from the young smokers. Now if the price of Cigarette increases the adult smokers will continue to buy the amount Qa but the young ones would adjust their consumption as per the prices. Since the quantity demanded of cigarette decreases for the young smokers, the demand for other good increases. But this does not happen in case of the adult smokers. Whatever be the prices of the cigarettes, they will continue consumption of the same amount .Hence the demand for other goods will remain constant or increase marginally. The above graph applies for the young smokers whose demand fluctuates with the changes in the prices. The initial demand for cigarettes is Q1 and the price is P1. The initial demand curve for other goods was D1. Now due to increase in the prices, the new quantity demanded would be less amount i.e. Q2. Thus the demand for other goods increases to D2. This change does not happen for an adult smoker. He does not change the quantity and is ready to pay the price differential. Thus the demand curve for other goods remains constant. Answer 3 Though tobacco as an addictive consumption cannot be explained by the general economics laws of demand and supply, it has to be kept in mind that there are social costs as well as time costs associated with the continuous use of tobacco. Economic Research has provided evidence of the fact that the demand for cigarettes does decrease with an increase in the prices of cigarettes (McGowan, 1995, p.113). The income levels of the individual smoker also have an effect on the demand for cigarettes. Studies across the world has shown that the demand due to an increase in the prices of cigarettes have fluctuated more in the underdeveloped countries than in the developed countries. This proves that the people of these countries are more price sensitive than their developed counterparts. But addiction of cigarette happens irrespective of the level of income hence an increase in the tax rate may appear to be regressive because it may affect the poorer segment of the population. The consumption habits of the past also influence the consumption habits of the future. Hence the people who have a record of consuming cigarettes more in the past tend to consume even more in the future. Thus if anti addiction programmes are done among the young smokers they might reduce their level of cigarette consumption. Mandatory safety disclosures on the packs of the cigarettes, anti-smoking campaigns may also reduce the consumption in a negative way (McEachern, 2008, p.91). Answer 4 The smoking of cigarettes is injurious to health. However, this is not the sole reason why the government imposes taxes on the products. The main reason is that the sales of cigarettes have an economic advantage for the government in terms of fulfilment of fiscal deficit. Since taxes are a major source of income for the government an increase in the tax rate would fetch a lot of revenue for the government in a particular year. The additional tax revenue could be utilised for funding other activities of the government. Thus the debt burden along with the fiscal deficit of the government would decrease. This would have a positive effect on the economy as a whole. Along with the economic benefits, the increase in tax rates would be beneficial from a social point of view as well. Increase in the tax rates would force the people to reduce smoking. This would be supplemented by saving of money for other uses. Thus the net incomes of the people would increase (Sexton, 2007, p.183). Again due to reduction in consumption, the costs associated with health issues and treatments would decrease. This would give rise to a fall in the medical expenses. The government by raising the money from the taxation can use it for the public healthcare services. Since there would be a reduction in the smoking rates the longevity of the people would increase as a result of which people will live healthier and longer lives more and can work for the benefit of the nation and the society. There would also be a decline on the rates of premature deaths and hence the future younger generation can live a prosperous life. The reduction in smoking will also have a beneficial effect on the environment. The negative effects of increasing the tax rate would be mainly on the companies that sell tobacco and the employees (Reid, 2005, p.89). If there is an increase in the tax rate and the people demand less of tobacco then the companies will have an adverse financial position as a result of which they will reduce the salary or cut the jobs of the employees as the production will decrease. The tax rate would affect the people would are addicted to smoking but belong to the lower segment of the society. It was found out after research that most of the chain smokers are the ones who belong to the lower income groups and the ones that belong to the higher income constitute a very little amount of this segment. The increase in tax rate may also lead to an increase in the smuggling of tobacco in an illegal way and in such cases the consumption would not reduce. It will continue taking place only in a disguised manner. This proves that increasing the tax rate would not necessarily reduce the cigarette consumption. The reduction in the production of tobacco would also have a detrimental effect on the producers of tobacco who live their lives on the cultivation of the crop. Question 5 The companies chiefly base their market research and market sizing activities based on economic analysis but there have been events of exception where it was found that the companies have taken off beat measures to push up the demand for cigarettes. For instance the American Tobacco Company distributed free packs of cigarettes to the military even free of costs or sold cigarettes much below the cost only to keep the demand for the product active in the slack periods (Czinkota and Ronkainen, 2007, p.164). They kept the addiction of cigarettes undamaged among the community so that the smoking habit is not destroyed by a rise in the tax rates which may not prevail in the long run. Question 6 The American Tobacco Company was the first in its category to make use of the Bonsack cigarette machine to produce the instant ones replacing the hand-rolled cigarettes. The products of the new machine were cheaper than the old ones and they also could be produced at the rates that were half of that of the hand-rolled ones. Teamed with this reduced cost pricing strategy, the company spent on aggressive marketing and advertising. This lead the company to a stable position in the market with most of the market share. Now as the price of the cigarette was decreased by ATC, the buyers bought this brand. Thus the quantity demanded for ATC increased and the quantity demanded by the smokers of the other brands decreased (Cox, 2000, p.43). As a result, the people smoking other brands substituted their consumption of tobacco using product of ATC. Thus the other firms had to move out of the market or merge with this brand in order to survive and make use of the cost advantage. References Mankiw, N.G., 2012. Principles of Microeconomics. Mason, OH: South Western Cengage Learning. McEachern, W.A., 2008. Macroeconomics: A Contemporary Introduction: A Contemporary Introduction. Mason, OH: South Western Cengage Learning. Gottheil, F. M., 2013. Principles of Microeconomic. Mason, OH: South Western Cengage Learning. Sexton, R.L., 2007. Exploring Economics. Mason, OH: South Western Cengage Learning. McGowan, R., 1995. Business, Politics, and Cigarettes: Multiple Levels, Multiple Agenda. Westport, CT: Greenwood Publishing Group. Cox H., 2000. The Global Cigarette: Origins and Evolution of British American Tobacco, 1880-1945. New York: Oxford University Press. Czinkota, M.R. and Ronkainen, I.A., 2007. International Marketing. Mason, OH: South Western Cengage Learning. Reid, R., 2005. Globalizing Tobacco Control: Anti-smoking Campaigns in California, France, and Japan. Bloomington, IN: Indiana University Press. Read More