Australia Tobacco Tax Increase

Hi, I've been reading this article that talks about the government increasing prices on cigarettes through tax and I started thinking about the applications of this through the things i've learned in class.

So basically a few things that I've come up with are

-Negative externalities of consumption
-Positive externalities of production(?)
-Government solutions to reduce cigarettes : tax
and also the fact that cigarettes are inelastic

The thing I'm confused about is that, if cigarettes are inelastic goods, then what incentive do addicted smokers have on quitting?

I would understand if they were extremely poor people but other than that I don't see a major change in consumption of tobacco.

So basically my question is, what else can you think of thats related to microeconomics from this article?

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Microeconomics IA Article.pdf 272.95 KB272.95 KB

Comments (4)

Best Response
Feb 12, 2013 - 4:06pm
CountryUnderdog, what's your opinion? Comment below:

Though deterrence is a goal, a lot of the tax revenue is justified in that smokers incur higher healthcare costs, which are now borne (to a certain degree depending on the individual) by the government. Therefore, the government states that it needs such funds in order to offset such increase in cost, and that this is the most equitable way to attain the tax since the majority of the burden (accounting for externalities) falls on the individuals engaging in the costly activities.

And while cigs may be inelastic, they are not perfectly so. There is a certain degree of elasticity (though reality hasn't hit it there yet for most). An interesting note may be that while cigs have inelastic demand, demand for health services is not (I realize the fallacy of this argument, but it seems like people today would rather buy a flat screen than get a physical) -- maybe an interesting study would examine the cross elasticity of the two and research whether the desire to attain cheaper medical care is stronger than the desire to smoke (so which demand is less elastic).

"They are all former investment bankers that were laid off in the economic collapse that Nancy Pelosi caused. They have no marketable skills, but by God they work hard."
  • 3
Feb 12, 2013 - 4:47pm
Blank999, what's your opinion? Comment below:

Whatever extra a smoker might cost, they save by dying early. And if the government doesn't want to bear the full cost of people doing dumb shit, maybe the government should get out of the business of being everyones mother.

Governments tax cigarettes because smokers don't for a voting block or a lobby and it is easy to milk them. This is why you rarely see increases in income tax rates or sales tax rates, but you always see increases in hotel taxes, cell phone taxes, alcohol taxes, taxes on sneakers (Chicago) and a million one off ways of stealing from groups of people large enough to matter, but too small to get together and make a difference.

We formed this entity to help with the common good. To build roads, fight wars, deliver mail across the country, etc. Not it has morphed into some parasite that see citizens not as its master, but instead as its meal ticket.

  • 3
Feb 12, 2013 - 10:04pm
moosen, what's your opinion? Comment below:

You're in the consulting forum. The one rule of cases: Always Be Segmenting

Consumers of cigarettes: addicts, first-time users and non-addicts (it takes a pretty large amount of cigarettes to really become addicted, on average). The former is inelastic to price, the latter isn't. Empirically, the cigarette tax is pretty effective at stopping teens and new users from starting, because they're dissuaded by the high price, or at least are dissuaded from buying too often (since getting addicted is also a function of how frequently you smoke).

  • 2
Feb 12, 2013 - 10:41pm
BrotherBluto17, what's your opinion? Comment below:

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