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IB Economics Commentary on Market Failure

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Commentary 3 This article from Newsaday.com, "proposed cigarette tax increase rile smokers in NY" is about cigarette smoking in New York as a cause to market failure. The government tried to tackle the problem of market failure through the implementation of an increase in indirect tax (a tax imposed on spending) In this article, I will evaluate whether the government intervention was effective with its method of eliminating market failure. Market Failure is the failure of an unregulated market system to achieve allocative efficiency (the situation when no resources are wasted) or social goals. In this article there are two causes to market failure: the oversupply of demerit goods (a good which the political process had decided is socially undesirable) and the negative externality of consumption (cost of consumption by society but not the consumers themselves). ...read more.


is relatively inelastic, as smoking has an inelastic demand and MPB = MSB , because there is no benefit involved in smoking. However Marginal Private Cost (MPC) (the marginal cost directly incurred by the producer of the good/service) shifts out as there is an externality that affects the third party, which will be covered through the implementation of a tax. In a free market, people would ignore the external costs to others, therefore the output would be at Q2 where (demand = supply), however this would be socially inefficient as social cost > social benefit. To account for this loss, a tax (S2) is imposed. The amount of tax is P3-P1. The red triangle is the area of dead weight welfare loss. It indicates the area of overconsumption (where MSC is greater than MPC). ...read more.


Furthermore, the main reason for a tax is to achieve social efficiency and if a tax is the method, then so be it. In reality, the awareness of the dangers of smoking have been around for a long time, so it can be inevitably said that people are making informed decisions for when they choose to smoke. However the social cost of smoking is larger with the problems of passive smoking and environmental concerns. Therefore It is absolutely necessary to try and reduce the number of smoker, for the welfare of others and to protect our planet. But, there are alternative methods the government could use which could reduce the number of smokers or decrease the pollution index, but at the same time not defect any other part of the country's economy such as crime rate. Other methods could include regulation of minimum age for smoking, the prohibition of smoking in certain areas. ...read more.

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