“In Tennessee, studies show 14,500 youths become regular smokers every year.” This new legislation is thought to bring this number down and decrease the market for cigarettes. If there are less people who begin smoking than those who quit or die, then the market for cigarettes will gradually decrease until there is no demand for cigarettes left.
3) Because the government is raising tax for cigarettes, they are also lowering tax for food. If food is assumed to be elastic, its responsiveness to price is high, then the demand for food will rise as shown in Figure 2. However because food is elastic, the incidence of tax will fall on the producers instead. Food is mostly agricultural and thus are most likely to be subsidised anyway. Therefore the government gains by not having to subsidise the food producers as much as before.
Figure 2.
According to the article, “the state has the country’s highest average food tax at 8.4%.” Food is a necessity and is an elastic good thus no matter how expensive it is, people will still consume food. But if the tax goes down, people will be richer in real terms and will have more money to spend on other goods besides food. Other markets will grow and the economy will grow as well.
4) The change to the taxes can be seen as a benefit to the state. Cigarettes are a demerit good, having a negative spill over on society, which the government is trying to lower the sales of. There are far too many smokers and their number must be reduced for people inhaling second hand smoke. If the number of smokers increase, the production possibility will decrease from A to B in Figure 3. as people will be getting sicker and thus not able to work and also taking away valuable time of hospitals and nurses which could be used to help someone else.
Figure 3. PPF curve of Tennessee
Even though “Tennessee has one of the highest percentages of smokers in the nation” it “only spends about $1.5 million on smoking prevention and treatment programmes annually.” This means that the smokers will pay the price later than sooner, as they will have to pay a lot for their treatment if they catch cancer. The tax money can then go to increasing the 1.5 million dollars and help the smokers finance their future treatment. Moreover, the number of people sick due to cigarettes will decrease and perhaps the state may be able to regain its production point to A.
Food is a necessity; no matter what the price people will buy it. So by reducing the price, people will be able to buy more or better quality foods which is better for the body, hence decrease the need for health care, which would also increase the PPF as less people will become sick and more are able to work. Because it is a necessity and something we need everyday, it takes up a considerable amount of money to pay for the food, and everyone consumes food. Therefore the decrease in the amount of money spent on food can be used to purchase other goods, whose market people were not a part of before but now more people are willing and able to buy.
The only stakeholder not gaining from this legislation is the firms producing cigarettes. With the new specific tax cigarette firms will decrease their total revenue. The firms will then see that the cigarette business is dying and reallocate their resources to another good which will bring more profit. However finding a producer substitute for cigarettes will be a challenge.
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