FINAL:
In the article Cigarette tax height spikes panic buying (Hall 2010); the following two economic issues were of interest to me.
-The demand changes on cigarettes with the upcoming policy to increase taxes by 25%.
Generally the price elasticity of demand for cigarettes is inelastic3. However with the tax burden on buyers and sellers, the price of cigarettes will increase and demands will decrease2. With the dependency on tobacco-delivered nicotine in cigarettes, the impact of demand for cigarettes after a price rise would vary upon individuals as mentioned in the article1.
I would expect the increase in tax of cigarettes would decrease demand overall but the extent to which demand of cigarettes respond to change in price would be based on how individuals rationalise the importance between their health, their income and their addiction to the cigarette3. For example, the price increase of cigarettes will be more sensitive for lower income earners4 such as teenagers who have limited affordability3. Adults who earn more money and have a longer dependency on smoking will continue to purchase the cigarettes. This is the case for my older colleges at work who put cigarettes at a higher value than the price they pay due to their addiction.
In the article, the comment was made by an individual stating that they would consider robbing a cigarette truck if prices of cigarettes were at $20 a pack and he would not buy it at that price1. The limitation when analysing price elasticity of demand is the volume of cheaper illicit cigarettes that is not accounted3. Generally an increase in tax would give incentives for individuals to purchase cheaper cigarettes in the black market or through duty free where illicit markets can evade tax5.
- The restriction on smoking advertisements and increasing funding to promote anti smoking campaigns.
The impact of restricting cigarette advertisements and promoting anti smoking campaigns is to decrease market size through reduction of proliferation6. Based on the economic concept of diminishing marginal product2, promoting anti smoking advertisements become ineffective after awhile because response to the advertisements will only work to a certain point and the responsiveness to cigarette consumption will flat line and start declining (graph 1.1 attached7). The principle would also apply, to smoking campaigns. This concept reinforces why there isn’t a significant reduction in cigarette consumption with partial bands on advertising3.
Graph1.1: Effect of anti smoking advertising on consumption of cigarette7
Referencing:
Ashley Hall 2010. ABC. 29th April 2010. Cigarette tax height spikes panic buying.
Christopher Finlay, Douglas McTaggart and Micheal Parkin 2010.Economics: 6th Edition. Frenchs Forest, Australia: Pearson Australia
Michelle Scollo and Margaret Winstanley,[editors] 2008. Tobacco in Australia: Facts and Issues 3rd Edition. Melbourne: Cancer Council Victoria.
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Professor Ian Olver and Maurice Swanson. 2010. With so many opinions on tobacco, let’s look at the facts.
Sarah Collerton. 2010. ABC. 29th April 2010. Tax hike has retailers fuming.
ABC/Reuters.2010.ABC. 29th April 2010. Government to demand no frills cigarette packets.
Henry Saffer. 2000. OUP (The World Bank). “Tobacco control in Developing Countries.” Tobacco Advertising and Promotion 3 (9): 215-236.
DRAFT
Cigarette demand of policies such as increasing excise on cigarettes and restricting smoking advertisements while promoting anti smoking campaigns was analysed in the article Cigarette tax height spikes panic buying.
Although the price elasticity of demand for cigarettes generally is inelastic, an increase in tax will burden both buyers and sellers and the price of cigarettes will increase and demand will decrease. With the dependency on tobacco-delivered nicotine in cigarettes, the impact of demand for cigarettes after a price rise would depend on the consumer. The demand of cigarettes will most likely decrease overall based on historic tax increases on cigarettes, however the extent to which demand of cigarettes respond to change in price would be based on various population groups and how individuals rationalise the importance between their health, their income and their addiction to the cigarette. The price increase of cigarettes will be more sensitive for lower income earners such as teenagers who have limited affordability. Adults who earn more money and have a longer dependency on smoking will continue to purchase the cigarettes. This is the case for my older colleges at work who put cigarettes at a higher value than the price they pay due to their addiction. Also it will take some time for consumers to feel they have hit their budget line and no longer can afford the cigarettes. This is when you start seeing consumers regularly borrowing cigarettes from each other. The limitation when analysing price elasticity of demand is the volume of illicit cigarettes that is not accounted. Generally an increase in tax would give incentives for individuals to purchase cigarettes in the black market or through duty free where illicit markets can evade tax. On the flip side, the extra tax earned from the cigarettes would also make law enforcement more effective.
The impact of restricting cigarette advertisements and promoting anti smoking campaigns is to decrease market size through reduction of proliferation. Based on the economic concept of diminishing marginal product, promoting anti smoking advertisements become ineffective after awhile because response to the advertisements will only work to a certain point and the responsiveness to cigarette consumption will flat line and start declining (graph 1.1 attached). The principle would apply, to smoking campaigns as well. This concept reinforces why there isn’t a significant reduction in cigarette consumption with partial bands on advertising.
Graph1.1: Effect of anti smoking advertising on consumption of cigarette
Referencing:
Ashley Hall 2010. ABC. 29th April 2010. Cigarette tax height spikes panic buying.
Christopher Finlay, Douglas McTaggart and Micheal Parkin 2010.Economics: 6th Edition. Frenchs Forest, Australia: Pearson Australia
Michelle Scollo and Margaret Winstanley,[editors] 2008. Tobacco in Australia: Facts and Issues 3rd Edition. Melbourne: Cancer Council Victoria.
Professor Ian Olver and Maurice Swanson. 2010. With so many opinions on tobacco, let’s look at the facts.
Sarah Collerton. 2010. ABC. Retrieved 29th April 2010. Tax hike has retailers fuming.
Cigarette tax hike sparks panic buying
By Ashley Hall
Updated Thu Apr 29, 2010 9:48pm AEST
The Government estimates its increase in excise will cut the number of smokers by 87,000. (AAP: Tracey Nearmy)
News of the Federal Government's tax hike on cigarettes sparked widespread panic buying of tobacco before the price rise took effect at midnight.
Prime Minister Kevin Rudd has confirmed the Government will raise taxes on cigarettes by an extra 25 per cent, adding another $2.16 to a pack of 30 cigarettes.
Mr Rudd has also announced a crackdown on internet advertising of cigarettes and the Government will spend $27.8 million on an anti-smoking campaign.
But , who say they are ill-equipped to adjust to the change within the time allowed.
Charity workers are also dismayed at the swift change in price and are anticipating a surge in calls for help as people divert money from the necessities of life to feed their smoking addiction.
The Government estimates its increase in excise will cut total tobacco consumption by about 6 per cent and cut the number of smokers by 87,000.
But some students are not so sure.
"I mean even if it goes up to $25 and you really want to smoke, you're going to buy it anyway," said one student outside the Sydney Institute of TAFE.demand- smokers value the cigarette more than its price
"It might stop the younger people because they like to spend their money on clothes and that, but the older people that have been smoking for over 30 years and everything, because their wages are going up as well, so I doubt it - I think they'll still be buying cigarettes," another said.- substitution for clothes and increase in wage
However, another student says further price increases may be enough to put him off buying cigarettes.- elastic demand- cant afford ( pushing past the budget line
"I tell you what, if they got to $20 a packet, which they're not far off now, I would consider robbing a cigarette truck. At that price I wouldn't buy them, no," he said.- illegal black market-force
Retailers scramble
The Government's announcement comes as it also moves to .- force
The increase will raise an extra $5 billion over four years which the Government will put towards its health and hospitals overhaul.- allocating resources (force)
Supermarket chain Woolworths is reporting big demand for cigarettes before the excise rise. Chapter 1, when you know the price will be more expensive afterwards, you are more likely to but more now.
Shoppers who would normally buy just one packet are buying three or four and it is the same story at tobacconists.
Simon Beynon, the sales and operations manager for tobacconist franchise Freechoice, is upset at the speed at which the tax hike has been introduced.
"It's physically impossible to get ready by midnight," he said. "We need to try and organise new pricing structures, new arrangements, so from that perspective it is just typical government, covering their own ass..
"To cover all their shortcomings over the last three years they've just decided to absolutely smash business.
"You go for a 25 per cent increment, every single person who smokes will try and do whatever they can to get the product at the cheapest price they can.- the illegal
"Individuals have been purchasing what they are able to afford. And having stated that, there's not that many individuals that can sit there and buy 15 cartons of cigarettes when they're charged at $90 a carton."
He says other retailers are going to swarm in and buy out the stock at this price. Chapter 1, when you know the price will be more expensive afterwards, you are more likely to but more now.
"If stores had the opportunity they would come in and buy your entire shop out, because they know if they can sit on it for a month or two they can make a nice windfall gain," he said.
Massive hit
Charity workers are also unhappy about the speed of the tax increase.
Senior researcher with the St Vincent de Paul Society, Dr Andy Marks, says poorer people are over-represented among smokers and it would help them more if the Government placed more of an emphasis on educating people about the benefits of choosing a healthy lifestyle.
He says people will continue to spend money on cigarettes rather than on necessities.
"It's a massive hit. It's expecting everyone to go cold turkey overnight really and I think the first thing we'll see is the majority of people, because it's an addictive drug, will continue to smoke, he said.
"We'll see an immediate impact. In fact we'll have an increase in people seeking assistance.
"We shouldn't rush to make value judgments here either, because as I mentioned it is an addictive drug, but there's also the psychological factors that go along with smoking.
"For many people, their 10-minute cigarette on the back porch is their only reprieve from an otherwise very oppressive existence, if you like."
But Quit Victoria executive director Fiona Sharkie estimates that 100,000 people will quit smoking as the result of the price increase and 25,000 children will not take up the habit.
"This is a concern that we hear from time to time and we can well appreciate that the social services groups who do such a great job may have this concern," she said.
"In fact, people from low-income groups are 13 times more likely to quit smoking in the face of a price increase than those from higher income groups. So it actually does work.
"It's a pretty immediate effect. So when we say 100,000 less smokers, that's pretty immediate."
She says a smoker would only have to cut their habit by two cigarettes a day to keep their budget in balance and that people from lower socio-economic communities have as much right to live a lengthy and healthy life as those from a wealthier background.
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First posted Thu Apr 29, 2010 7:46pm AEST
