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Tobacco consumption to increase until year 2010.

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Introduction

Commentary 1 Date of article: January 8, 2004 Title: Tobacco consumption to increase until year 2010 Source: Agence France-Presse Author: Unknown Word Count: 745 words (excluding quotes and reference to principles) According to the UN Food and Agriculture Organization, the worldwide tobacco consumption is expected to increase until the year 2010. This is especially true in developing countries. Moreover, the number of smokers is expected to grow from 1.1 billion in 1998 to 1.3 billion in 2010. Despite the rise in tobacco consumption globally, the consumption of tobacco per adult is expected to drop by 10 percent in 2010. The main causes of the increase in tobacco consumption and demand are the projected increase in population and the growth in income. The best way to reduce tobacco consumption is to use a combination of tax and direct restriction policies. Tax is a government intervention that benefits the government only; the consumers and producers are both worse off. ...read more.

Middle

The factors mentioned above will shift the supply curve. As the production cost is reduced, the supply curve will shift outwards, with supply at a quantity Q" sold at a price P". To reduce the consumption of tobacco per adult, the Food and Agriculture Organization suggested "using a combination of tax and direct restriction policies." Referring to Fig.2, the imposition of tax has increased the production cost, which shifts the supply curve inwards. As the producers have to sell at a price lower than they used to, they would produce less cigarettes or simply close down the business for lack of profit. Eventually the consumers have to pay more than they used to and they would buy less. In conclusion, the imposition of tax is an extremely effective way to reduce the consumption of tobacco. As mentioned in the second paragraph, tax benefits the government but not the consumers and producers. Fig. 2 shows how the money is taken from the consumers and producers by the government. ...read more.

Conclusion

Tobacco is a demerit good, there is an external cost in consumption endured by the 3rd party that is not part of transaction. Fig. 3 shows how the external cost (EC) affects the market. Reference can be made to the following principles: MSB(marginal social benefit) = MPB(marginal private benefit) + EB(external benefit) MSC(marginal social cost) = MPC(marginal private cost) + EC(external cost) In Fig. 3, S=MPC=MSC since there is no external cost in production. But external cost exists in consumption, which is negative external benefit to the MPB, resulting in MSB to be below MPB. From this, we can see that the private optimal quantity is larger than the social optimal quantity. This is over consumption. To remedy this market failure, the government can impose an indirect tax to shift the MPC inwards, making Q and Q* the same. This is identical to Fig. 2, where Pc increases and Pp decreases such that the government gains the tax revenue. Finally, there are other solutions rather than legal restriction and tax, such as education, prohibition and promotion. These methods can also reduce the consumption of tobacco. ...read more.

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