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The economics of smoking

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Introduction

INTRODUCTION TO ECONOMICS ESSAY IN MICROECONOMICS - THE ECONOMICS OF SMOKING- Word Count: 1477 a) Many factors have a part in determining demand for cigarettes in the UK. However, price is the most important factor. Price will affect the position of the equilibrium along the demand curve. If the demand curve was to be drawn, elasticity of demand curve would have to be considered. This is a standard downward sloping demand curve. When the price of a good rises, the demand for it falls. However, for some goods such as necessity items, the demand curve looks like this. This is an infinitely inelastic demand curve where however much the price changes, the quantity demanded remains the same, i.e. at Q*. This is an infinitely elastic demand curve where the slightest change in price can alter the demand. Though cigarettes are essentially a luxury item, the elasticity of the demand curve is unlikely to be an extreme situation. The elasticity should be high but as cigarettes are highly addictive, the demand curve is relatively inelastic as a change in price is not very likely to affect demand. ...read more.

Middle

The tax imposed on the production of a good, increases the firm's costs. The firm's supply curve will shift vertically upwards by the amount of the tax. In the above diagram, the elasticity of demand has not been considered as that will decide who bears the tax incidence. Although the tax is imposed on the firms, they will try to pass as much of it as possible to the consumer through higher prices. The extent to which they can do this is determined by the price elasticity of demand. In part a), it was deduced that the demand is relatively inelastic. In this case where the demand curve is inelastic, the consumer pays most of the tax. This is because, even if a large tax of (PT - P) is imposed, only a very small quantity of (Q - QT) would not be demanded. The revenue gained when taxing goods with such a low price elasticity of demand, is a very good source of income for the government. The tobacco industry alone produced over �10 billion in tax revenue in 1998 for the UK (news.bbc.co.uk : 28/09/99) ...read more.

Conclusion

Smoking costs the NHS approximately �1.5 billion a year (www.ash.org.uk). This is a financial externality cost even to the non-smoking taxpayer. Most government interventions are demand side measures. However, a supply side measure that can be taken is the control of smuggling tobacco. Smuggling tobacco into the UK has increased recently due to the high tax levels. People are buying cigarettes from for example France (where with the tax and even the cost of travel included, the price of cigarettes is relatively cheaper). Though the state that it is for personal use, it is then illegally resold in the UK. The government has to intervene as this obviously increases the crime rate and because an estimated �1 billion of revenue is lost each year (Parkin, Powell & Matthews, 2000 : p.164). All government interventions are not always effective enough to overcome the market failure but it has to be done. The government would mainly want to intervene as although they can help smokers with providing the relevant information, they also need to help children and other non-smokers. Cigarettes are a de-merit good that would be over-consumed if there was no government intervention as would be in the case of a free market. ...read more.

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