• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Market Failre Portfolio

Extracts from this document...

Introduction

Title of Extract Smokers fuming about higher taxes on cigarettes Source of Extract Nelson, Lloyd J. "Smokers fuming about higher taxes on cigarettes." Daily Comet. 10 Mar. 2009. 11 Mar. 2009 <http://www.dailycomet.com>. Path: article;20090310;ARTICLES;903100996;1026?Title=Smokers-fuming-about-higher-taxes-on-cigarettes. (http://www.dailycomet.com/article/20090310/ARTICLES/903100996/1026) Date of Extract March 10, 2009 Word Count of Commentary 748 words Date of Commentary May 6, 2009 Section of Syllabus Section 2: Market Failure Writer of Commentary Rammy Al-Abssi Portfolio Assessment - Market Failure Caused by many different reasons, on February 4, 2009 President Barack Obama signed a legislation that increased federal taxes on tobacco to its highest prices yet. The taxes will be enforced on April 1 on all tobacco products. "Beginning April 1, the federal tax on cigarettes will go up from 39 cents per pack to $1.01 per pack. Large cigars will be taxed 40 cents a piece, up from 5 cents... ...read more.

Middle

Therefore, this article would fit under the negative externalities of consumption. The negative externalities of consumption produced when smoking cigarettes make the marginal social benefits less than the marginal private benefits. The diagram above shows how the marginal social benefits are less than the marginal private benefits, and therefore the welfare loss is produced. The private utility is reduced by the negative utility suffered by the third party due to second hand smoking. People who smoke regularly do enjoy the private benefits of smoking; however, this immediately creates external costs for other people. Due to the fact that it is a free market economy, consumers will consume at the level where MSC = MPB. The negative externality which is being created will be ignored causing a welfare loss and a market failure. At this point the government will act to reduce or eliminate the negative externality. ...read more.

Conclusion

However, there are also numerous limitations which arise when studying Obama's decision. First, cigarettes have quite an inelastic demand. This means that taxes do not manage to reduce the amount of cigarettes smoked very much. Basically this could mean that there was no dramatic change in the negative externality or welfare loss. Also, if the taxes placed on tobacco is raised too much than this can lead to many different corrupt actions. For example, if on April 1 when the taxes are enforced, a huge amount of people stop buying tobacco, the people could look for other sources of supply. One case could be a black market forming between the US and Mexican boarder. If drugs and tobacco are smuggled illegally, this could lead to many worse negative externalities. According to this analysis, Obama's decision to raise taxes a little more was a smart decision. The taxes were not raised enough to help form a black market; however, enough to force some people to quit smoking and also helping the expansion of the Children's Health Insurance Program. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Economics Portfolio - Market Failure

    More specifically, this situation would fit under the existence of externalities. An externality occurs when the production or consumption of a good has an effect upon a third party. In this case, smoking cigarettes is harmful and therefore this would be considered as a negative externality.

  2. Alabama's Cigarette Tax Article. The basic economic problem in this article is negative externalities. ...

    long time ago, since the tobacco industry is not a new industry. Secondly, the government will impose further indirect taxes on cigarettes, in order to reduce consumption. Therefore, it needs to assess the cost of negative externalities to society. It then sets tax rates on those equal to the value of the externality.

  1. Market Failure IA Commentary. This article is about the price of cigarettes in Macao ...

    Therefore, the government will try to reduce the supply and demand for these demerit goods. The consumption of cigarettes imposes negative externalities on our society. Smokers gain private benefits such as enjoying smoking cigarettes and private costs like damaging their own health.

  2. Strategic and Operational Performance Assessment at Petrom

    OMV Petrom Group serves all segments from small households to large-scale consumers. * Started construction of a 860 MW gas fired power plant - as part of Petrom's strategy to expand the gas value chain and leverage the electricity industry liberalization by entering the power generation market.

  1. Economics Extended Essay - To what extent has the market for paintings in South ...

    "Confidence levels in the once-booming market for Indian art have dropped 63 percent since October as prices slide, Bloomberg reports. A new report published by London-based research company ArtTactic shows its confidence index for Indian contemporary art alone declined even more, by 90 percent, during the same period."4 This led

  2. Has the Time Come to Legalize Drugs?

    As is illustrated on Figures 1 and 2, due to the fact that drugs are a necessity to drug-addicts, they are willing to buy pretty much the same quantity of the drug at any price, thus making the price elasticity of demand of drugs inelastic (when the quantity demanded remains similar as the price changes).

  1. Free essay

    Economics- Portfolio

    These reasons, however, are only some aspects of these developing countries that make it difficult for growth. For example, many countries have large deficits and public debt, high credit growth as well as inflation.

  2. The Benefits of Microcredit to Bangladesh

    The poorest of the poor in the country are entering the coterie of the elites. Shift in the occupational pattern: There has been a shift in the occupational graph from agricultural waged labor considered socially inferior to self- employed petty trader.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work