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Econ micro essay cigarettes
Subject: Economics
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Degree • Grade:
Sixth Form (A Levels)
• A2 - A LevelWas this document helpful?
Evaluate the Impact of Government intervention in the cigarette market
The cigarette market is one which causes much controversy around it’s impacts that it brings about
for the economy. It is argued often that the negative effects bought about by having such a market
often exceed the positive ones. For example It is quite well known that the price elasticity of
demand for cigarettes is inelastic and thus the incidence of tax is borne by consumers more so
than by the firms that produce the cigarettes themselves thus, in this way the consumption of
cigarettes by individuals is seen as generating greater revenue for the government however the
negative externalities bought about by the consumption of cigarettes i.e passive smoking, is shown
to have a considerable burden on the NHS and the number of smoking-related admissions has
increased year on year, treatment is costly per admission and thus the overall costs of treatment
on the NHS may exceed the extra revenue bought in from the consumption of
cigarettes. This is just one controversial issue facing the cigarette market not just in
the UK but worldwide.
Cigarettes contain tobacco which is essentially
addictive and thus user find themselves compelled to purchase more and more
hence the reason for cigarettes being demand inelastic (PED -0.35) this essentially
means that at higher prices demand is not as responsive to the change in price.There are many
habitual users who regardless of the cost continue to purchase cigarettes. The price of a packet of
20 cigarettes ranges from £7.70 to £9.50. This price is relative to consumers income however
generally it is seen as quite expensive especially to those from a low-income background. People
from lower classes who smoke are hit the hardest by the cost of the cigarettes and when the
government implements higher taxes on cigarettes this has the greatest effect on lower-income
backgrounds. Government intervention on cigarettes ultimately arises for two reasons, one of
which may be to generate extra revenue for the government, this additional revenue can then be
spent in areas which need to be improved upon e.g infrastructure, schooling the police force. The
second reason for intervention is to try and reduce the negative effects especially to one’s health of
smoking. In the passage it states that ‘Tobacco taxes are the most cost- effective way to reduce
tobacco use, especially among the young and people in low-income groups. A tax increase that
raises tobacco prices by 10 percent decreases tobacco consumption by 4 percent in high income
countries and 5 percent in low and middle income countries’. Although this statistic shows a
positive outcome initially, in the long term it is dependent on how far addicted each individual is to
tobacco as stated before cigarettes have a relatively inelastic demand so in the short term higher
prices may deter people consuming only for so long. However in the long term taxation is not as
efficient an approach as consumers will continue purchasing cigarettes due to their addictive
nature.
Demand is not responsive to a change in price due to addictive nature
of cigarettes PED -0.35
Government intervention on cigarettes is not just through taxation, cigarette packets now show
graphic photos of the harmful consequences on smoking ,many are labelled with negative slogans
of what ultimately may happen in the long term if you continue smoking however again due to the
addictive nature of tobacco in cigarettes this has not proven that effectively. Compared with
taxation though there has been some positive outcome in this scheme in which numbers have
Welfare loss to society
from negative externalities
of cigarettes
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