Economics Smoking Topic - Essay Example

Cigarette Smoking and Taxes This study answers specific questions by which policymakers can reduce demand of cigarettes, find out determinants of elasticity, and the impact of raising taxes to demand and consumption. What are some ways public policymakers can reduce demand of cigarettes? There are three ways within which public policymakers can reduce cigarette demand.

These are raising taxes, non price measures and intervention. Taxation has been the most widely used method to reduce demand of cigarettes by many government to generate taxes, but more recently, taxes are raised to minimize damage to health by smoking. (World Bank Group) Illustration below shows shifts of demand when price increases.Illustration says that when price is set at $100, quantity demanded is 6, but when it is increased to a higher price, there is a shift of demand and quantity declines to 4.

The study of WB has confirmed this illustration thru a conclusion in their report that raising taxes significantly reduces consumption of tobacco. Study has shown that price increase due to taxes has an impact to the youth who are more responsive to prices than older people. Result of study shows also that the low and middle income countries are more responsive to price changes than the high income countries. (World Bank Group). As shown in annex 1, the tax increases imposed in Canada, UK and South Africa have encouraged smokers to reduce smoking consumption Non price measures used by policy makers are publicized findings of research on the health effects of smoking, warning messages on cigarette labels, counter advertising on media, school anti-smoking campaigns, cigarette promotions and advertising, no smoking on public places, restaurant and workplaces.

(World Bank Group)Third measure is intervention that is done thru nicotine therapy and cessation.(WB Group)Determinants of elasticity and elasticity of cigarettesElasticity of commodity could either be elastic or inelastic when price changes. Response of consumers to price change is influenced first, by availability of a substitute, when consumer can take time, could wait and look for substitute. Second, when the good is a necessity and market structure is in an oligopoly. (Basic Economics).

The generally accepted principle in elasticity is when the price elasticity of a good is less than 1, the good is price inelastic; and that the change in price will only have a small effect. At this point, there will be more revenue with the increase of taxes. (Farlex Dictionary) Demand for cigarette is price inelastic because according to a report done by Prabhat, J. et. al, DCPP, that from among 100 studies done in high-income countries, price elasticity is -0.25 to -0.50. This means that “a 10 percent increase in price will reduce consumption by only 2.

5 percent to 5.0 percent” (Prabhat). 3. 3. Suppose the government decides to implement a tax on cigarette manufacturers in order to raise the price of cigarettes. How much does the amount of smoking respond to changes in the price of cigarettes? Above example is an illustration of supply and demand. When price was set at $100, quantity demanded is 120 packs. When tax is introduced, price is raised to $120 per pack, then quantity demanded declines to 100 packs. Price elasticity of demand is determined by getting the % change in quantity demanded divided by % change in price change.

To find percentage change in QUANTITY demanded To find percentage change in PRICETo find price elasticity of demandThe price elasticity of demand is 0.033 which is low which means demand is inelastic, that change in price will have a small effect in demand, or a 20% increase in price will only cause a 3% decline in consumption.Who pays the larger burden of the tax (buyer or seller)? Tax incidences are always shared by the buyer and the seller, but as to who should share the larger burden of the tax will depend on the determinants of the price elasticity.

For instance, if demand for the product is inelastic than supply, or product is a life saving one, buyer is willing to pay for the product and absorb the taxes.On the other hand, if demand for product is elastic than supply - for example – a change in price of a Brand A washing machine due to tax– will lead customer to switch to Brand B because of a much lower price. Here, seller will have to absorb a larger portion of the tax just to get a sale.Another example is in the case of oligopoly market structure, wherein there is only one seller of goods as in utilities.

Demand is inelastic because people will have to consume water, electricity, toll fees, regardless of the amount of the commodity.When demand is inelastic, taxes paid by buyer is more than the seller and when demand is elastic, burden of tax is more on the seller.In our earlier graph we have a scenario wherein tax raised is by 20%. Product is needed immediately, demand is inelastic customer is charged with 16% tax and seller is charged with 4% tax. Price of product before tax is $100, after tax $120.

Quantity before tax is 120 packs, after tax is 100 packs. Total tax is .20 x 100 = $2000.How does the price of cigarettes affect demand for other illicit drugs such as marijuana. There is very little information about effect of substitution of marijuana or illicit drug to replace cigarette smoking because of its increase in price. However, economic theory suggests that the youth are more responsive to price. The theory states “as the price of product rises, the quantity demanded of that product falls”.

Chaloupka, F. & Pacoula, R. (p. 194) These authors said that several studies found that tobacco and cigarette smoking is not exempted from this economic principle. Relevant to this, Goel, R. in his study, said that greater consumer income increases illegal drug use, but does not seem to have a significant impact on smoking and marijuana use”. Demand, according to Goel, contradicts other findings and is now becoming more to be elastic; and that consumers seem to view cigarettes and marijuana as substitutes.

To find the impact of prices to cigarette smoking and marijuana use, comparison of prices of both are presented. Both prices of marijuana, an illegal smoke, and cigarette are highly priced. Ave. cost of a pack of cigarette $4.50 A stick of cigarette costs $0.225An ounce of marijuana costs (est.) $28.36One joint (1 to 1.5 grams) $1.00Price difference $0.775Source: Smith, H., Money Central / Urban DictionaryImplication of this price difference is on the price sensitivity of youth that according to the economic theory is “ is inversely related to age for several reasons.

” (Chaloupka, J & Pacula R. p. 194) It is concluded in this study that cigarette smoking youth is more responsive to price than adult smokers; that a 10 percent increase in price would reduce youth smoking consumption by 5 percent or more. This finding is consistent with our previous discussion of elasticity of cigarette demand which is less than 1.It is assumed therefore that with the 70% difference of price, youth will be sensitive to marijuana consumption and will stay away from this drug because of price.

Annex 1Source: WB GroupSource: WB GroupSource WB Grou[References citedBasic Economics. “Elasticity of Supply and Demand”. 29 April 2010. Chaloupka, F. & Pacula, R., “The impact of price on youth tobacco use” Smoking and Tobacco Control, Monograph No. 14, p. 194. 29 April 2010Farflex.com. “Elasticity of demand” definition. http://encyclopedia.farlex.com/elasticity+of+demandOwen, J. “Street prices of cannabis, ecstasy and cocaine at an all-time low.” 2006. 29 April 2010 Prabhat, J., et. al.

“Interventions to Reduce Demand for Tobacco. “ 46. Tobacco Addiction. Disease Control Priorities Project. 29 April 2010 Rajeev K. Goel. “Cigarette prices and illicit drug use: is there a connection?  29 April 2010 Smith, H. “The high cost of smoking. msn money central.” http://articles.moneycentral.msn.com/Insurance/InsureYourHealth/HighCostOfSmoking.aspx Urban Dictionary. “Joint: Usually 1 to 1.5 grams, Price:$1” http://www.urbandictionary.com/define.php?term=30+grams.weedWorld Bank Group.

“Economics of Tobacco Control”. Chapter 4, Measures to reduce demand. http://www1.worldbank.org/tobacco/book/html/chapter4.htm.