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Volume 3, Number 2: October 2019 | Article
According to Jeanrenaud and Soguel (1999), market failures of cigarettes consumption or smoking occurs in the form of externalities, incorrect risk perception, and addictive behavior. When these three occurs, government could use selective excise tax to bring consumption closer to the Pareto-efficient level.
An externality is an economic term referring to a cost or benefit incurred or received by a third party. (Kenton, 2019) There are 2 types of externality in the market, positive and negative and can come from either the production or consumption of a good or service. However, in this scheme, we will focus on negative externality as smoking emits negative pollution to the society. Social welfare will be reduced if the externality-based costs are higher than the externality-based benefits. The increased of health care system costs and loss of worker productivity is caused by smoking. If such externalities do exist, there will be a loss in social welfare as smokers’ decision on consumption is socially inefficient. When externalities exist and high transaction cost of individuals’ bargaining occurs, government would implement a policy which is Pigouvian taxes which is imposing tax on cigarettes in order to internalize the externalities and bringing consumption closer to the Pareto-efficient level. Another policy that the government should implement is smoke-free policy. The smoke-free laws are the policies to protect nonsmokers from secondhand smoke. However, smoke-free laws can also motivate and help smokers to quit smoking and prevent the use of cigarettes. Studies have shown that the smoke-free laws and policies can reduce smoking initiation among workers and youth.
For a perfect market, in order to maximize the long-term welfare, economic agents would possess sufficient knowledge on which to base decisions and use. Thus, the market failure exists when there is imperfect knowledge on consuming goods. For instance, if the smokers have imperfect knowledge about the health risks of smoking, they will be unaware of their own internal costs which leads to higher consumption than the Pareto-efficient level. As there is an incorrect risk perceptions, the government could close the information gap by making campaigns for people to concerned more about risks of smoking. Therefore, the consumer could adjust their decision in line with the Pareto-efficient level.
Market failure would exist if consumers act irrational in smoking decision. The past consumption raises the present consumption as the past use of substance leads to a higher marginal utility of the present use, this is the characteristic of an “addiction”. The past consumption tends to encourage present use as one benefit of smoking is to prevent nicotine withdrawal to an addicted smoker. Most smokers start smoking at a young age even though, selling cigarettes to children is illegal. Scientist believes that nicotine is sensitive to young brains than brains of older people. There is also evidence that children underestimated the risk of becoming addicted to nicotine. Most could not quit smoking and regret of having started.
In conclusion, when market failures exist, it causes inefficient allocation of resources and maximization of social welfare. In my point of view, I could not see any good point of cigarettes consumption. Therefore, reducing the amount of smokers would be good for all, individuals and society. In order to solve the problem, implementation of the tax on cigarettes would reduce a huge amount of smokers. As people normally try to maximize their own utility. Therefore, before the government impose the tax, smokers will likely to focus only on their own utility without concerning about the externality that might affect the third party. However, after the tax was imposed, the smoking rate is likely to be lower as they have to give up their utility which in this case is smoking with the tax they have to pay. The government could also help by giving the correct information about the risks of smoking would be very helpful to society as people would be more aware of cigarettes consumption. In this way, we could solve the market failure problem on cigarettes consumption.
References
Cancer Council (2019). The Economic Rationale for Intervention in the Tobacco Market. The Cancer Council. Retrieved from https://www.tobaccoinaustralia.org.au/chapter-17-economics/17-3-the-economic-rationale-for-intervention-in-the-tobacco-market
CDC (2014). Smoking & Tobacco Use. Centers for Disease Control and Prevention. Retrieved from https://www.cdc.gov/tobacco/data_statistics/fact_sheets/secondhand_smoke/protection/reduce_smoking/index.htm
Gulh,N. & Hughes, D. Cigarette Smoking and Market Failure : A Determination of the Economically Efficient Cigarette Tax Rate. Retrieved from https://www.westga.edu/~bquest/2006/cigarette06.pdf
Kenton, W. (2019). Externality. Investopedia. Retrieved from https://www.investopedia.com/terms/e/externality.asp
I really enjoy your reading. Your point of view is really strong and I understand the dark side of cigarettes of what you think. However, as smoking is an addiction, it would be hard to see the efficient result after imposing tax. This is because of the addiction that is really hard to be solved. Also, the electronic cigarette like Juul and Wave are still not legalized in Thailand. I believe that if there is other substitution of cigarette, we can reduce smoking from cigarette more efficiently. Therefore, i think the government should allow other options of smoke in the society to reduce smoke and pollution in the economy.
I agree that people are consuming too much cigarettes despite the fact that it is very harmful to everyone including themselves. However, I think that by increasing the tax on cigarettes, it will not help much in reducing its consumption. Imposing higher taxes is like solving the problem at the end result; we need to fix the root causes of the problem first. There are many factors why people choose to smoke, and we have to prevent them from happening. Many people smoke because they are stressed and need a way out, and once they got a chance to try it, they are likely to become addicted to the substances. I agree that more education suggested by the author would help increase the consumer’s consciousness and help solve the problem. Nevertheless, I would like to add that for me, to reduce the amount of cigarette users, we need to come up with ways that can help people relax such as encouraging more exercises and promoting social connectivity. If people were happy with their lives, they might not start smoking in the first place and not become addicted to it. As a result, there will be less people smoking.
I understand and agree with your point of view about how dangerous is the consumption of a product like cigarettes, but maybe, as Nataccha already replied, a tax is not the best solution to reduce consumption. The demand curve of cigarettes is, as an addictive substance, pretty anelastic. And that’s why the economic factor is not the only rope we have to pull to fight its consumption. For all the people that use cigarettes as a way to alienate themselves, maybe a higher price is not enough to help them quit. Maybe a solution to do (not alternative) is to make weekly or monthly meetings on the model of the “alcoholics anonymous”, or other solutions that make smokers feel that they are different from non-smokers, like the special smoking zones that are in Singapore.
Firstly, I do not agree with you that if the government gives the information about the risk of smoking, the people will be more aware of cigarettes consumption. Actually, everyone knows how harmful it is and they still consume too much of it. Secondly, I don’t think that increasing the tax will reduce the amount of consumption as much as you think. Cigarette company won’t stay still. As their sales decrease, they will differentiate their products by selling the product at different prices. The cheaper price of the cigarettes also lead to cheaper tax. Moreover, this might lead to the companies’ profit maximization. To be more clearly, the company will, in the end, sell cigarettes at the same retail price as before the government increased the tax. The company can do this by reducing cost. As a result, people still consume it. So, in my opinion, if the government increases the tax on cigarettes and , still, its retail price did not increase when comparing to other products. The tax increase will not effective.
I do agree with your point that people are consuming too much cigarette. However, I also do not agree with some of your points. Everybody know the risk of smoking but still consume it anyway. Also I don’t think that increasing the tax on cigarette will help since people smoke because they are addicted to it. This made a cigarette becomes a necessity for these people therefore doesn’t matter how much the tax increase, these people are still willing to pay for it.
As Nut mentioned before, I highly agree with the argument that the government does not provide enough information regarding the risk of smoking cigarettes. On every pack of cigarettes there are warnings and pictures provided by the government. In addition, there are many campaigns which are focussing on warning the society about the health risks of consuming cigarettes. Therefore, I would rather focus on the addictive part of cigarettes. As you mentioned before, the younger people experience a form of nicotine, the easier they will get addicted. Thus, making sure that young people are not able to get in contact with cigarettes is crucial. In addition, empirical research has shown that smokers are relatively price inelastic. Which means that will not achieve the desirable pareto-efficiency. Besides my critical points, your essay is well-structured and I really liked reading it!