There is big negative externality in smoking and over-consumption of alcohol. The damage caused by smokers and binge drinkers extends over and above the individuals using them.

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National Health Service (NHS) is universal health care provided to all those living in the UK. In the past few years, however the patients have been complaining about the long waiting lists, low quality services, etc.

A large number of patients who refer to the NHS for treatment are those who do not look after themselves and are not ready to change their negative habits to maintain a healthy life, for example some do not pay attention to the advice of their doctors to give up their smoking or drinking, or do some exercise or avoid overeating. Prime Minister Gordon Brown is now saying that it is not fair for those who look after their health to carry the burden of those who abuse the services of the NHS by ignoring medical advices and causing long queues for medical treatment by smoking and drinking carelessly.

There is big negative externality in smoking and over-consumption of alcohol. The damage caused by smokers and binge drinkers extends over and above the individuals using them. Cigarettes and alcoholic beverages can therefore be classified as demerit goods. The social costs of the use of these goods are higher than the price paid for them by their consumers. This means that there is a marginal external cost to such goods. As a result, a welfare loss triangle (the blue shaded area seen on the diagram above) is formed.

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 Governments attempt to correct the market failure by introducing excise taxes on goods such as alcohol and cigarettes to cover this external cost. However, even when the prices of these Giffen goods rise, the demand for them does not stop because their usual consumers do not like to change their lifestyles. As time passes it becomes clear that the estimated externalities due to the use of these goods were underestimated and there is still need to address the problem. Sometimes, the problem is addressed by the direct increase in the prices of the same goods, or by ...

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