Around to reconsider before smoking another cigarette.Below, figure 1,

Around the world from the turn of the century, there were hundreds ofmillions of regular tobacco users. Then, the cigarette industry flourished as boomingdemand for cheap tobacco skyrocketed to all-time highs. Now cigarettes are marked acause of market failure due to its nature as a demerit goods. Where the oversupply ofa demerit good is considered a market failure due to its negative externalities ofconsumption. New York is one major metropolis taking action in reducing thenegative externalities of cigarette consumption through municipal policies. New YorkCity’s mayor, Bill de Blasio, decided to increase the price for cigarette packets by$2.50 from $10.50 to $13 by imposing indirect taxes. They are also planning to beginan anti-smoking campaign. But there are certain impacts that hindering theconsumption of a good like cigarettes can have on the economy. But to what extentdoes government intervention in prohibiting cigarette consumption impact theeconomy?Market failure is a situation where markets do not efficiently nor effectivelyallocate its available resources. In the present case. an oversupply and overconsumption of a demerit good, cigarettes, is the root of the market failure. Thegovernment will have no choice but to interfere with this case. One way they can dothis is by imposing an indirect tax, which will push producers to increase prices inorder to keep their profits. As the law of demand states, as price increases, demanddecreases. The government hopes that increasing cigarette prices will force them tostop consumption of that good. However, one must take into account the addictionfactor; people who regularly consume cigarettes are prone to addiction, this willprompt them to buy cigarettes with disregard to the effect it may have on otheraspects of their lives. This is where a second measure must come into place.Anti-smoking campaigns are becoming increasingly common in mostcountries. A prominent example being Australia with negative advertising involvinggraphic images of cancer-stricken lungs and dead bodies that advocate a strongmessage against smoking, pitching the ‘Smoking Kills’ line. Showing provocativeimagery will push smokers to reconsider before smoking another cigarette.Below, figure 1, is an illustration of the impacts on society in terms of marginal socialcost and marginal private cost.Fig. 1 Diagram showing the negative externalities of consumption of cigarettes. Themarginal social costs are much higher than the marginal private costs, which cause awelfare loss in the triangular region. This welfare loss can be represented by fallingconsumer health and/or rising cancer deaths due to cigarettes.Below, figure 2, is an illustration of the negative externalities of consumption onmarginal private benefit and marginal social benefit.Figure 2. Diagram illustrates welfare loss due to higher marginal private benefit at thecost of lower marginal social benefit and higher marginal social cost.For the government, the imposition of higher taxes on cigarettes will result in highergovernment tax revenue, which can be used to invest in infrastructure or the provisionof merit goods like healthcare and education. However, higher taxes will causebusinesses to either increase their prices to retain profit levels or lay-off workers anddecrease production. Either way, cigarette firms will incur lower income due to lessconsumption. If a layoff does occur, unemployment will rise as workers will lose theirjobs due to a cut in production. However, the nature of their jobs as unskilled jobs willallow them to find work elsewhere with greater ease, the main problem being formore skilled workers whose skills are based in the cigarette industry. In this case twothings may happen, the worker works in another industry or ends up working for acompetitor, which may harm the firm who loses the worker. For consumers, highertaxes will cause prices to increase and force them to decrease their consumption.However, some consumers who are unaffected by the rise in prices due to addiction orhigh levels of income will continue to consume cigarettes. Eventually, people willadapt to the increased prices and base their expenditure around the rising prices.In conclusion, governments must take all necessary measures to reduce theoversupply and/or over consumption of demerit goods in an effort to reduce marketfailure and improve their citizen’s welfare. However, they must keep in mind theadverse effects it may have on the economy including rising prices, risingunemployment and a weakened industry. Creating policies that work around theseimpacts but help reduce market failure and negative externalities are instrumental in asuccessful legislation.


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