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Economic Commentary - The article talks about the measure taken by the New York state legislature to reduce smoking by increasing the excise tax[1] by $1.25 on every pack of cigarette

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Introduction

The article talks about the measure taken by the New York state legislature to reduce smoking by increasing the excise tax1 by $1.25 on every pack of cigarette along with already existing Clean Indoor Air Act makes New York a national leader in tobacco controls. I will be analyzing the smoking externality2 and possible measure to eliminate the external cost. Smoking is a negative externality because the marginal cost of smoking a cigarette is usually under looked. The unregulated market system takes into consideration only the marginal private cost (MPC)3. Both smokers and non-smokers 4 pay a high cost as it worsens their health. This is the reason why firms that produce at Qe5 are overproducing from the social view point (refer figure 1). ...read more.

Middle

Taxes won't work that well as smoking is an addiction which means demand is inelastic. According to the coase theorem, the voluntary agreement 12fails 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. ...read more.

Conclusion

Together the external cost is internalized. Furthermore, the revenue collected from taxing can be used for health purposes and educating people in the future. 1 Tax on the sale of specific items 2 A cost or benefit that arises from an economic transaction and falls on people who do not participate in that transaction 3 Firms opportunity cost of producing one extra unit 4 Second hand smokers 5 Quantity supplied at competitive equilibrium 6 Total cost paid by the society for producing/consumption of one extra unit. 7 Equilibrium quantity with increased taxes 8Price at competitive equilibrium 9 Price at regulated equilibrium 10 Point where demand and supply curve meets 11 loss to the society because nobody gains from it 12 Negotiation method ?? ?? ?? ?? ...read more.

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