We all know that cigarettes are price inelastic, demerit goods, and when consumed, lead to air pollution, which is a negative externality. A negative externality is the cost imposed on a third party during production/consumption of a good, and no compensation is made. The case of passive smoking proves to be a very serious one as recent research carried out by the International Agency for Research on cancer showed that passive smoking causes lung cancer in non-smokers.
In this case, the marginal private cost, MPC, is the cost incurred by the smoker in buying the cigarette, and any accepted risk he is willing to take with regards to contracting lung cancer. The external cost would be that the people around the smoker experiences discomfort, as well as possibility of getting lung cancer. The marginal social cost, MSC, would be the cost to the individual, as well as those others affected by the cigarette smoke.
In the case of negative externality, the smoker always consumes the cigarettes at a quantity greater than that of the socially desired output, over consumption of cigarettes. This would result in the MSC being greater than the MPC, giving rise to an external cost, imposed on the people around the smoker. Consumption of cigarettes by the individual at market equilibrium also results in the society incurring a welfare loss.
Our society currently faces a problem of having many smokers, as stated in the article "Tobacco wars: Singapore the picture of health" that 14 percent of our population smokes. This gives rise to a large amount of external cost, which is not socially desired as production and consumption of cigarettes is not at social output. As a result, the government has to intervene, and lay out measures to reduce the amount of smoking. As cigarettes are price inelastic goods, introducing taxes on cigarettes may not be very effective, as it would not work well in deterring smokers from smoking. Thus, our government has set up various measures such as "having to have up to 50 percent of the front and back covers of cigarette packs bearing any of the six pictures of people who have contracted diseases due to smoking that the Singapore government has chosen to appear on a rotational basis." Also, the government has implemented laws such as the banning of smoking in certain areas so as to reduce the harmful effects of passive smoking.
The use of taxes is good as using taxes to internalize external cost is very appealing. It allows markets to continue operating according to market forces. Although costs have been inflated by taxes, consumption and production decisions are made while firms and households are free to pursue their self-interest. However, since cigarettes are price inelastic, the implementation of taxes may not be very effective in controlling the problem and reducing smoking as an increase in price would not have a great effect affecting the consumption of cigarettes. Laws and regulations, in this case, is more beneficial as it is a command-and-control policy, and is generally accepted that use of compliance standards through laws has led to a reduction in pollution levels. The outcome is predictable, unlike the use of market-based approaches such as taxes. However, there are monitoring and enforcement costs involved in government agencies having to monitor and ensure that regulations are adhered to.
Credits: Chelsea Chang, Shawn Poh, Marcus Foo, Leow Yan Ling and Wang Enshen
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7 comments:
perhaps a graph on the huge chunks of explanation could be more easily understood by readers.
so the price is inelastic, what if the company charge very high prices? did government set a price ceiling for it?
kaiyan
You talked about having pictures printed on the cigarette packs to deter smokers. However, an article in the Straits Times' showed that smokers already know what the consequences of smoking. All the pictures did were to force the smokers to ask for the pack with the least offensive picture on it..
Sim Yok Teng
i think that the group has done well in their analysis report. they have shown how smoking is a negative externality.
The group has effectively covered the possible outcomes and consequences in the consumption of cigarettes. Making use of economic theories and example allow me to understand the concept of negative externalities better.
very true; i agree that increasing cigarette prices to reduce consumption has'nt reduced pollution levels substantially and that implementing a command and control policy by slashing cigarette import is a more useful approach.
reuben chan sc6
Although demand for cigarettes is price inelastic, wouldn’t taxation still be effective? Because its demand is price inelastic, most of the tax would fall on consumers, thus discouraging new consumers from picking up the habit. Wouldn’t this count as being effective in controlling the problem too?
Cigarettes aren't price inelastic. The demand for cigarettes is.
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