Tax On Smoking: Kills Or Heals

March 21, 2012

Building from scratch we know that it is the simple mechanism of micro economics wherein the market forces of demand and supply determine the prices of goods and services in the economy. Here the commodities that fall in picture are cigarettes and drugs. Both of which are hazardous to human life and governments of different countries has put in several efforts to discourage people indulging in these activities.

Cigarette after burning ashes of cigarette bidi after smoking cigarette put off

Have you ever thought how a tax levied on these commodities will affect the behaviour of consumers? To answer this question we first look at any normal good, how its quantity demanded by the consumers will change once tax is levied on it. Assuming that the burden of the amount of tax levied will be borne by both the consumer and the producer in the same proportion. We see that the quantity demanded of the good will tend to decline as imposition of tax will increase its price level. When this good has become dearer an obvious reaction by public at large would be to buy less of it.

Likewise should be the case with cigarettes and drugs. But no, this is not completely true. The law of demand surely functions but also has its negative impact. As youngsters or adolescents are more sensitive to such a change they start demanding less of it, because they can no more afford it. But in some cases where medical scientists say that the consumers are addicts, illegal or criminal activities tend to rise. Since addiction makes for the consumer resistance of the product hard people especially teenagers tend to steal, smuggle or hoard cigarettes and drugs.

Policies that authorities have used in the past to reduce the consumption of these goods can be categorized into two. The first one is making mass appeal to people at large. Public service announcements, mandatory disclosure of health hazards by manufacturers, printing of horrifying pictures of burnt lungs and other cancerous pictures on packs of cigarettes, prohibition of advertising of such products in the media be it print or electronic, ban on its visual projection in movies and serials. All these policies have been aimed at reducing the quantity demanded of cigarettes and drugs at a given price level. If we look from an economic point of view these policies were meant to shift the demand curve to the left. But I am afraid that this category was not as successful because if we have a look at the statistics we still have a large number of patients dying each year due to lung cancer and related diseases.

tax on smoking and cigarettes is it justified a man smoking and giving out smoke

The second category of policies that the governments have tried to implement involves the economics of movement along the demand curve. The objective remains the same to reduce the quantity of cigarettes and drugs demanded. As talked above the authorities impose taxes on such commodities. Since the consumers of such goods face an inelastic demand for the good the major proportion of the tax imposed is transferred to them by the producers. They end up buying less of it because it is now out of pocket for them. I my view this policy is more implementable and has even been more successful than the first one. But every coin has two sides and this category also has a dark side to it as in developing countries like India and mostly in some underdeveloped countries this leads to a higher crime rate in the society. This policy is actually responsible for a loss to social welfare. We can look at smoking as an externality and that too a negative one. Because one person smoking is affecting the wellbeing of a person who is not but he is still exposed to passive smoking which has its own ill effects with no compensation paid to him for being subject to such adverse conditions. According to welfare economics if we plot the demand and supply curves of cigarettes and drugs we will come to know that for a given demand curve for drugs a socially desirable demand level is shown by a demand curve which is below the initial curve.

Stand taken by opponents of goods like cigarettes being taxed consider drugs like marijuana and cigarettes as close substitutes. In countries like USA high prices of cigarettes lead to a higher demand for drugs like marijuana. As cigarettes will be expensive so people would rather go and buy marijuana instead for the simple reason that it is cheaper in price.

Looking at the various subjects of economics and social sciences that smoking cigarettes and consuming drugs like marijuana involve, it is time to be aware of some facts and figures which would prove to be evidence for us to decide if these policies really worked or were just a mere waste of time and energy of the respective authorities. I leave the question unanswered.

This is a guest post from Mansimran Kaur – IBS Hyderabad.

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