Why does smoking lead to an external cost?

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  1. Why does smoking lead to external cost

Smoking is an example of a demerit good. Demerit goods are goods which are overprovided by the government (people feel that they are provided in great quantities and there should be less of them); it creates large quantities of negative externalities. The fact that they are demerit goods is a reason that smoking costs the country billions of pounds a year. External costs are costs which affect society as a whole as opposed to just the individual. Smoking leads to external costs because it affects the health of the individual. As a result of this the NHS spend more time treating patients with smoking-related health problems when they could be treating patients with far more serious health problems such as Cancer. Waiting times in the NHS are much longer, especially in the A & E department as a large number of those patients are there with smoking-related health problems such as mouth and lung Cancer. Another external cost of smoking is that it creates large amounts of street litter, not only does this make the environment look bad but it also has spill over effects on another party for example workers of the council that are employed to clean litter of the streets. Smoking as well as affecting the health of the individual can also affect the health of others in the form of passive smoking. A number of people die or suffer lung damage as a result of being around someone who smokes; most affected would be families as they are more in risk of health problems from passive smoking and may be neglected of spending quality time with family members because of smoking. Smoking also has a bad smell and was a problem prior to the ban of smoking in public places.

  1. Evaluate the case for imposing high rates of tax on tobacco to solve this problem

The diagram above shows the impact of a high rate of tax on cigarettes. Tax on cigarettes is known as an ad valorem tax which is based on percentage of the market price, so the larger the quantity that is bought, the higher the rate of tax. When the price of cigarettes is higher, there is a shift in quantity supplied from Q1 to Q2. This is shown by a shift in the supply curve from S to S post tax. Higher tax rates would restrict the amount of cigarettes that are bought and so will reduce the amount of negative externalities and external costs of smoking. The revenue collected from the tax on cigarettes can be used can be used to correct the external costs that smoking creates, for example revenue collected can be put towards the NHS in order to reduce waiting times and provide new equipment and medicines for patients. It can also be put towards other merit goods- goods which are underprovided by the government (goods which people think should be provided in greater quantities) and create large quantities of positive externalities such as education which creates external benefits.

The disadvantage of imposing high rates of tax on tobacco is that tobacco has a very inelastic demand. This means that there is little responsiveness to a change in price of tobacco. Therefore, the high rate of taxes will have little effect on the quantity that is bought. There are little or no alternatives to tobacco, the alternatives available are illegal and create equal amount of negative externalities. Perhaps the government should consider other alternatives to a high rate of tax such as making tobacco illegal, although this could cause heavy protesting. Perhaps they could use the revenue that is collected from the tax on tobacco in the form of rehabilitation for patients to stop them from smoking or on other products that could encourage people to stop smoking such as nicotine i.e. nicorete patches and inhalators.

In conclusion, it depends on the amount of the tax rate, which in this case is high. I believe that high tax rate on tobacco is the best method to solve external costs because other alternatives could lead to out roar and heavy public protest, however, the government use the revenue collected from the tax on rehabilitation and products to encourage people to stop smoking.  

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  1. Explain the main forms of protection used to restrict international trade

Protectionism is the economic policy of restraining trade between countries. There are three main forms of protection against international trade and they are as follows; tariffs- A tax on imported goods which raises the domestic price of imports and thus restricts demand for them; quotas- a physical limit on the quantity of an imported good; Subsidies- a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to ...

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