The New York state is planning to reduce the equilibrium quantity from (Qe) to (Qe’) by increasing tax on cigarettes. The reason behind this tax increase(Pe’’- Pe) of $1.25 is that smoke from cigarettes disrupts environment and public health. This increase in tax will lead to an increase in equilibrium price from (Pe) to (Pe’). The new equilibrium point is efficient from social view point as the MSC is equal to MPC (as shown in figure 2). However, when the increased taxes will be implemented it will create a Dead Weight Loss (DWL). Furthermore, it is hard to determine the amount to be taxed as putting price tag on externality is difficult. The reason behind this is- how can you determine the cost of inhaling smoke for 1 hour, how it affects different people. Taxes won’t work that well as smoking is an addiction which means demand is inelastic.
According to the coase theorem, the voluntary agreement fails in this case because a large number of people are involved and costs of transaction are big. Unfortunately, negative advertisement on every pack of cigarette i.e. “Smoking is injurious to your health” has also proved futile.
The introduction of tradable permits in places where they don’t exist and increase in prices at already existent will prove handy. Agreements like the “Koyoto protocol” which was signed between nations should be signed between the states of US. These agreements will give different places permissible overall level of pollutiton and they have to abide by them.
Government intervention is highly needed as legislative measure like “No Smoking” in resteraunts, hospitals, offices and schools if enforced with a greater impact will lead to reduced consumption. Restricting places to smoke will benefit smokers as they will smoke less. Passive smokers will benefit the most from this measure, as now they won’t have to inhale the polluted air. Society will improve as the interests of adolescents in smoking, who are the future of a nation, will decrease; thereby helping to achieve the aim of preventing kids to start smoking.
In the end, having analyzed all the possible measures to make the environment smoke free. A combination of both taxing cigarettes and restricting places to smoke will be the best because both the measures have loop holes which can only be fixed if enforced together. As the law of demand states that the quantity demanded decreases with an increase in price, therefore the increased price will reduce the quantity of cigarettes bought hence improving the health of smokers and restricting places to smoke will primarily benefit passive smokers. Together the external cost is internalized. Furthermore, the revenue collected from taxing can be used for health purposes and educating people in the future.
Tax on the sale of specific items
A cost or benefit that arises from an economic transaction and falls on people who do not participate in that transaction
Firms opportunity cost of producing one extra unit
Quantity supplied at competitive equilibrium
Total cost paid by the society for producing/consumption of one extra unit.
Equilibrium quantity with increased taxes
Price at competitive equilibrium
Price at regulated equilibrium
Point where demand and supply curve meets
loss to the society because nobody gains from it
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